The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

AB 8 and Unintended Consequences: Funding the Pool

Posted by Alan on August 17, 2007

AB 8 requires employers to pay 7.5 percent of their Social Security payroll ($97,500 this year) on health care coverage. Two calculations are actually required: one for full-time employees; one for-part timers (working less than 30 hours a week).  The employees of companies which choose to pay this fee are required to enroll in a state run purchasing pool. If the funds are not enough, the manager of the pool, the Managed Risk Medical Insurance Board (MRMIB) can raise the fee. MRMIB also determines the benefits provided in the pool. So they sit in a very interesting position: they determine the demand,  the supply and subsidy of the purchasing pool.

Supporters of AB 8 call the 7.5 precent charge a “fee;” opponents call it a “tax.” The debate is more than academic. If it’s a fee the bill can be passed into law by a majority vote of each house of the Legislature. If it’s a tax, a two-thirds vote is required. Some of you may have noticed that the Legislature has a bit of a problem coming up with two-third majorities, which is why there’s no state budget yet. This will no doubt be the topic of law suits if the bill is “passed” by a simple majority, but it’s not the topic of this post.

Neither is the fact that “pay-or-play” systems like that envisioned by AB 8 appear to run afoul of ERISA pre-emption.  What this post is about is whether the 7.5 percent charge is sufficient to pay the bills of the new purchasing pool. Because if it’s not, then AB 8 will lead to continuous increases in the fee/tax. And if the fee/tax becomes an unacceptable burden on businesses, the result will be depressed wages as company revenue is diverted to the fee, lost jobs as companies move out of state or put off new hiring, and a resulting reduction in state revenues, undermining the state’s ability to pay for other services. Such a result would truly qualify as an unintended consequence.

The California Chamber of Commerce is among those who claim 7.5 percent charge won’t be sufficient on Day One. On the other hand, researchers at places like the UC Berkeley Labor Center produce studies showing the fee/tax is sufficient.

But Day One is not the only day Californians will have to live with the fee and the purchasing pool. Let’s consider what might happen down the road. And if past is prologue, an interesting issue would be see what would have happened if this scheme had been introduced in 1997. For that, let’s revisit our favorite inflation calculation site, the amazing “Tom’s Inflation Calculator.

For purpose of this thought experiment, assume that in 2002, there’s a company in California whose average Social Secruity wages are $40,000 per employee. A 7.5 precent charge against that payroll would generate $3,000 per year. Let’s further assume that this revenue is sufficient to pay for a health insurance policy through a state-run pool. In other words, let’s assume in 2002 the payroll fee/tax was sufficient to pay for the coverage provided.

Now let’s turn to Tom’s calculator.  The $40,000 assumed salary in 2002, adjusted for U.S. Wage Inflation, would be $45,427.22 in 2007. Applying the 7.5 percent fee/tax on this salary generates $3,407.04 (the cents are provided to give this high-level calculation a false sense of precision).  Now take the $3,000 cost of coverage in 2002 and adjust it for U.S. Medical Cost Inflation. Assuming insurance premiums just kept up with the cost of underlying care, the cost of coverage in 2007 would be $3,695.75 — 8.5 percent more than the revenue received. To make up this difference, the 7.5 percent fee/tax would need to be raised to 8.1 percent of wages.

That doesn’t sound like much of a miss, but it assumes the rate of medical cost inflation remains flat compared to what it was in the 2002-2006 period (for various reasons, Tom’s calculator does not include the target year’s inflation rate in the calculation). Yet the population is getting older. Technology is getting more expensive. Consumer demand is increasing. Does anyone really believe that will be the case? And with the state of the economy, does anyone contend wage inflation will increase at a faster clip in the future?

To put it simply, by pegging the cost of health care coverage to payroll, AB 8 makes a fatal flaw. The changes of them increasing in lock-step is virtually nil. Instead, health care costs are likely to increase at a far greater rate than wages. Which means the payroll fee/tax will need to increase — often and substantially — over time.

The result, those unintended consequences mentioned earlier.


One Response to “AB 8 and Unintended Consequences: Funding the Pool”

  1. Alan,

    How are they going to “make / force” employees to purchase from the pool that their employers have contributed to?

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