A key feature of President Obama’s proposed public health insurance plan is the employer pay-or-play mandate that would require America’s companies either to provide employee health insurance or to pay a penalty tax or fee to the government. The purpose is to prevent employers from dropping their health insurance and dumping their employees on the public plan.  It won’t work. Companies survive by selling things for more than the cost of making them. Producing and selling things require paying employees. Long ago, an employee’s pay was whatever he took home at the end of the week. Later, employee compensation expanded to include various so-called “fringe” benefits, most notably health insurance.

But to the employer, no matter what such payments have been called or who received them, they have always been part of the total employee compensation package. And that total has always been determined by one essential factor—labor market competition. If the prevailing compensation for a machinist is $75,000 per year, then no business is likely to hire one by offering less. It makes no difference to an employer whether it pays a salary of $75,000 with no benefits or a salary of $60,000 plus health insurance costing $15,000. It all comes out of the same pot labeled “employee compensation.”

This brings us to the proposed pay-or-play mandate. If employers are required to pay more for health benefits, the money must come from a reduction in employees’ wages and salaries—or from layoffs. Long term, there is no other source. Initially an employer might accept lower profits (or higher losses), raise prices, or engage in expense cutting, but those are short-term approaches at best. The only long-term option is to cut employee costs by either reducing wages or replacing workers with automation or other productivity improvements. Otherwise the company will eventually go out of business.

None of this is economically controversial. But the President knows he won’t get very far telling employees they must pay all of their ballooning health insurance costs from wage and salary reductions or lost jobs. Instead, saying that employers must pay more sounds better, even if it means the same thing. Pay-or-play is nothing more than a government mandated diversion of employee compensation to support an increasingly inefficient, bloated, overpriced, mediocre-quality health care financing and delivery system.

And pay-or-play won’t work to prevent employers from dumping their employees onto the public plan.  Small employers with their higher insurance costs will find virtually any conceivable tax penalty preferable to maintaining employer-sponsored insurance.  Many large employers’ will join the stampede to the exits if the government, as expected, keeps public plan premiums artificially low by imposing below-market provider reimbursement rates; by undercounting administrative, overhead, and capital costs; and by providing favorable treatment and exemptions not available to private insurers.

It would be far better to simply give employees all the health care money and let them buy their own health insurance and health services. Such a consumer-based health care market is currently not allowed, but it could cure virtually all the ills of health care cost, quality, availability, and accessibility.  That option should be on the table.

This entry was posted in Government vs Markets, Health Insurance, Myths and Bad Ideas, The Health Care Crisis and tagged , , , , . Bookmark the permalink.


  1. Theresa says:

    This is exactly what my co-workers have been talking about around the lunch table. It’s becoming a hot topic. Is Obama even open to listening to this?

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