People who get health insurance through their employer under national health reform will lose over $6,000 in wages annually -- but that is actually a good thing. It means we can extend health insurance to many of the 50 million uninsured in the U.S. efficiently without killing jobs. The key is the "individual mandate" to purchase health insurance, which is at the center of the Supreme Court case on the Affordable Care Act (ACA).
The legal distinction between the individual mandate and a tax is an important one. To satisfy two different legal standards, the federal government argued first that the penalty associated with the individual mandate is not a tax but the next day argued that it is. But as economists, we also know there is also an economic distinction between a mandate and a tax that is at the heart of the rationale for the individual mandate: efficiency.
By relying on an individual mandate, the federal government is effectively incentivizing people who are on the fence about purchasing health insurance. If people already value health insurance, perhaps not enough to purchase it, but partially, the mandate just makes up that difference. Individuals who gain health insurance through their employers will continue to work for lower wages and health insurance, the compensation package most working Americans face.
To see why, consider a simple fact: your employer doesn't really pay for your health insurance, you do. When making hiring decisions, a company focuses the total amount it spends on compensation, not the breakdown between salary and other benefits. When offering jobs to potential employees, employers reduce salary to account for the contributions that they must make to health insurance premiums. Potential employees then have to decide, are they willing to work for lower wages and have health insurance? Given the fact that employer-sponsored health insurance is the primary source of health care coverage for most Americans under 65, most employees are. Of course, the ACA is not focused on those people. Instead, the individual mandate is intended to provide a nudge to people who have been unwilling or unable to obtain health insurance.
Starting in 2014, people without health insurance will pay a penalty. Not having health insurance will not only impact access to health care, but it will actually cost money. In this new world, we assume people may be willing to make the bargain for lower wages in exchange for health insurance not only because they get coverage but also to avoid paying a penalty. If they are, health reform will not be a "job killer" at all. Instead, wages will fall, but people will obtain health insurance and remain employed.
Assumptions about behavior are nice in theory but what will happen in practice? After all, we all know what assumptions do to you and me. In this case, though, we can actually test whether wages fall in response to an individual mandate in the real world. Whether Mitt Romney cares to admit it, the Massachusetts health care reform of 2006 was nearly identical to the ACA in all of its key elements, including the individual mandate. In our recent research, we study how Massachusetts reform affected wages and employment and find some striking results, all of which demonstrate the efficiency of relying on an individual mandate to increase insurance coverage.
It turns out the mandate actually requires people to purchase something that they want. On average, the newly insured valued about 75 cents of every dollar of coverage that they received through their employers. People who could have accessed subsidized health insurance on the state's health insurance exchange valued employer coverage less. For people without this subsidized alternative, wages declined dollar-for-dollar with the cost of the health insurance they received. Despite substantially lower wages, these workers stayed at their jobs, working roughly the same number of hours. In other words, they worked the same amount for less money in their pockets because they were getting something else in return: health insurance. The individual mandate provided that little extra kick to get people to work for something they mostly valued already.
Because people valued their newly obtained health insurance, the individual mandate was an extremely efficient way to expand coverage. How efficient? We compare the approach in the ACA instead to financing new government health insurance through a tax on wages. With a tax, wages are lower but working no longer provides access to health insurance directly. The distinction between a mandate and a tax turns out to be very important. The distortion to employment under the individual mandate in Massachusetts -- in terms of wages that would have been paid to those who are no longer working -- was only 5 percent of what it would have been had the government taxed workers to pay for the identical benefit! This substantially smaller distortion demonstrates the power of mandates to accomplish policy goals. In Massachusetts, relying on an individual mandate to expand health insurance was not a "free lunch" but it was a 95 percent off sale.
The Supreme Court's task is to rule based on the legal questions at hand, but we think the economic ones are also important, given the Massachusetts experience.
More:Health Care Individual Mandate Obamacare Health Care Mandate Health Care Reform Romneycare Salaries
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