The Public Health Option and Lessons from the San Francisco Experiment

Posted on Categories Health Care, Labor & Employment Law

Medical_symbol2 As I prepare to provide brief commentary on various legislative provisions for a CCH publication that will explain health care reform legislation once it is finalized, I could not help but take notice of this important op-ed. It is by a trio of labor and health economists that ran in the New York Times this weekend on the much discussed public option and its relations to employers being mandated through a pay or play system to provide health insurance for their employees.

Here’s a taste:

TWO burning questions are at the center of America’s health care debate. First, should employers be required to pay for their employees’ health insurance? And second, should there be a “public option” that competes with private insurance?

Answers might be found in San Francisco, where ambitious health care legislation went into effect early last year. San Francisco and Massachusetts now offer the only near-universal health care programs in the United States . . . .

[W]e have seen how concern over employer costs can be a sticking point in the health care debate, even in the absence of persuasive evidence that increased costs would seriously harm businesses. San Francisco’s example should put some of those fears to rest. Many businesses there had to raise their health spending substantially to meet the new requirements, but so far the plan has not hurt jobs . . . .

So how have employers adjusted to the higher costs, if not by cutting jobs? More than 25 percent of restaurants, for example, have instituted a “surcharge” — about 4 percent of the bill for most establishments — to pay for the additional costs. Local service businesses can add this surcharge (or raise prices) without risking their competitive position, since their competitors will be required to take similar measures. Furthermore, some of the costs may be passed on to employees in the form of smaller pay raises, which could help ward off the possibility of job losses. Over the longer term, if more widespread coverage allows people to choose jobs based on their skills and not out of fear of losing health insurance from one specific employer, increased productivity will help pay for some of the costs of the mandate.

In case you think this is all a bunch of liberal, Democratic mishigosh, one of the authors of this op-ed happens to be non-other than William Dow, a senior economist who worked for President George W. Bush’s Council of Economic Advisers.

In other words, increasing evidence is out there that health care reform with a public option and an employer pay or play mandate might be just what our system needs to rein in health care costs while at the same time providing health insurance to a much larger segment of American society.

[Cross-posted on Workplace Prof Blog]

4 thoughts on “The Public Health Option and Lessons from the San Francisco Experiment”

  1. “More than 25 percent of restaurants, for example, have instituted a “surcharge” — about 4 percent of the bill for most establishments”

    In other words, the wage-price spiral.

    Why not just mandate that all jobs pay at least $20/hour? The employers will be able to afford it, because they’ll all have to raise their prices the same amount!

  2. Tom: your sarcasm aside, your comparison above doesn’t really work.

    The restaurants are passing on the additional health costs to customers (through the surcharge). And of course, this is not being “mandated” for any restaurant.

    This is not the same thing as raising the compensation of your employees to cover increased health care coverage. I think you are comparing apples and oranges.

    Prof. Secunda

  3. I don’t think that Tom is comparing apples and oranges at all. There is a difference (perhaps) between a $20/hr minimum wage and this type of plan, but not a difference that undercuts his point.

    All things equal, this is a mandated increase in the cost of labor. By raising the cost of labor, a number of things will necessarily happen. The details are dependent, as economists say, on “the shape of the curves.”

    Imposing a requirement of this type will cause the market to reach a new equilibrium. Where Tom’s example differs from the San Francisco proposal, is that, in SF, this new equilibrium could include, in addition to increased prices, lower profits and less employment, a reduction in cash compensation.

    To suggest that this is not the case is tantamount to denying the existence of evolution. The economists Paul cites don’t do that, but argue that the San Francisco example suggests the changes in this new equilibrium will not include lower employment.

    This is mishigosh. It is, in fact, multiple mishigosh. First, I am reluctant to draw any conclusion – even about San Francisco – based on several months of data during an economic downturn in which employees are being let go for a variety or reasons. Second, there is no reason to believe that the “shape of the curve” in San Francisco will resemble that of other markets. Third, this new eqilibrium will involve winners and losers. It may benefit health care providers at the expense of other industries. It may increase employers’ incentives to invest in labor saving technology. It may result (much as our current system has) in an increase in the share of compensation consisting of health care and a decrease in cash compensation. We could go on.

    Professor Secunda and I may believe that this is “better” than the outcome in the absence of this type of “pay or play” plan. But, if so, we ought to concede that we are imposing our own notions of the good on market participants and that we do so at a cost.

    Personally, I think that making employers responsible for their employees health care distorts the labor market and true reform would focus on, among other things, moving away from that very accidental and irrational historical accident.

  4. Agreed, my sarcasm aside – yes, for purposes of this discussion, it is the same as raising the compensation of employees to cover increased health care costs. If the premium for health insurance rises $10,000 per employee, and the employer pays that instead of asking the employee to pay that, the employee’s compensation has increased $10,000.

    The amount being paid for each employee has risen across the board, and a number of employers have responded by raising the price of their goods. Even the employers that didn’t initially raise their prices can now do so and still stay competitive.

    (Outside purposes of this discussion, the difference is that if you raise the wage/salary of the employees so they can cover increased health care costs, they are the ones making the decision on how to spend the money.)

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