Health Care Reform

The broad outlines of likely national health care reform are taking shape, and it's looking like there will be an attempt to do something roughly along the lines of the Massachusetts plan that was put in place by then-Gov Mitt Romney.

Two features of the likely plan are closely linked. The first is so-called "play-or-pay" taxes. These are taxes on firms that choose NOT to provide health insurance for employes. The second is a subsidy for working poor (people who don't qualify for Medicaid but still have trouble affording insurance).

So why are these linked? When people think about taxes, they think about "government revenue." But we should also think about "incentives" when we think about taxes. The role of the play-or-pay tax is to make it costly for firms to drop the employee health insurance they currently offer.

To understand why firms would drop, we need to think about why firms choose to offer insurance in the first place. Firms offer insurance because it's a form of compensation that employees value. If a firm drops insurance, some employees would likely quit their jobs, and try to find a job with an employer who did offer insurance. The "cost" to a firm of dropping insurance is the cost of the lost employees.

Now think about how this changes once the government starts offering a subsidy. A firm that drops insurance would find that some of its employees could apply for the subsidy. These employees might not quit. This means the "cost" to a firm of dropping insurance will be lower.

And if the cost of anything goes down, people do more of it.

So, we might worry about more firms dropping insurance after the subsidy goes in. This would increase the amount of people who have to be subsidized, and raise the price tag for taxpayers.

The play-or-pay tax is there to make it less attractive for firms to drop coverage.

One potential problem though: This tax will raise the cost to firms of hiring workers. For firms that don't offer benefits, the cost of hiring a worker is pretty much just the wage. If this tax is implemented, the cost will be the wage plus the play-or-pay tax. And if the cost of hiring a worker goes up, firms will hire fewer workers.

The trick will be to give firms incentives to not to drop insurance, while at the same time NOT giving them incentives to stop hiring.