Wednesday, Oct. 13, 2004, 12:01 a.m EDT

Jon Gardner
Health Affairs

Average Uninsured Workers’ Pay Could Drop
After California’s ‘Play-Or-Pay’ Health Insurance Law

Health Affairs Article Says The New Law May Suppress
The Number Of Newly Insured Workers

BETHESDA, MD—California’s employer health insurance mandate will change the behavior of employers and workers in ways that may reduce future wages and alter the number of workers who actually gain health care coverage, according to a new analysis published today on the Health Affairs Web site.

The potential reduction in wages is estimated to be between 5 and 19 percent of the average uninsured worker’s wage in California. Such a reduction in cash wages may suppress the number of workers who will be added to health insurance rolls under the law if they decline coverage or switch jobs to regain their former wage levels, according to the analysis by Anna D. Sinaiko, a doctoral candidate in health policy at Harvard University. Researchers have estimated that the number of newly insured workers would be 1.07-1.56 million because of the new law.

Employers may also respond to the costs of the new mandate by raising prices or restructuring their workforces. The law, which requires that employers either offer coverage to workers or pay into a state fund for a public program to cover their workers, and in either case pay 80 percent of the premium, is set to take effect in January 2006 if it survives a referendum to repeal it on November 2.

“Although state governments can mandate that employers provide coverage without committing public funds, someone must pay for the newly provided health insurance,” Sinaiko says.

“In the best-case scenario, workers will value health insurance at more than its cost, and the combination of health insurance and lower wages will make workers better off without any adverse effects on employment or product prices,” she says. “A more likely scenario is that some of the cost of health insurance will be passed to consumers, some felt by workers as unwelcome wage reductions, and some avoided by firms as they restructure their workforces.”

Based on wage and insurance premium data, Sinaiko estimates that the wage reduction could be 5 to 19 percent of an annual gross income of $31,100—the average annual wage of those who would gain eligibility for health insurance under the law—an amount equaling about 54 cents to $2.09 an hour.

Previous research has shown that employers pass along 83 to 100 percent of health insurance premiums to their employees. The average premium for single coverage in California was $2,845 in 2002, and for family coverage it was $7,471. Sinaiko’s estimates were based on a range from 10 percent less to 10 percent more than the average premiums.

Employers can avoid some of the costs of the employer mandate by raising prices. Ninety percent of the California firms that do not offer benefits compete with other firms that do not offer benefits, making price increases a potential alternative, particularly for restaurants or retail stores that face only local competition. But for firms that face national competition, price increases may not be possible, Sinaiko says.

Restructuring the workforce also may be an option for employers. Downsizing, outsourcing, or favoring overtime by full-time employees over part-time labor—for whom extension of health benefits is expensive relative to their total compensation—are alternatives employers may pursue, Sinaiko says.

The author also warns of potential adverse selection in the state-run program that that will be created under the “play-or-pay” scheme California would set up. Data show that average health risk—an indicator of premium costs—of employees in the most expensive 10 percent of employer-sponsored insurance groups is 2.78 times that of the least expensive 10 percent. If the state does not adjust the fee for the public pool based on demographic and health risks, the public pool could end up with more costly enrollees, Sinaiko says.

The analysis is available at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.469.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research.



©2004 Project HOPE–The People-to-People Health Foundation, Inc.