The Employer Mandate is an Employee Nightmare

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In his September 9 speech to a joint session of Congress, President Obama tried to breathe new life into his health reform effort. While the speech helped answer some of the questions about his priorities, it did little to assuage Americans’ concerns about several key proposals, particularly the “employer mandate.”

This directive would force most businesses to either make a substantial contribution to their employees’ health coverage or pay a steep penalty. At first blush, this may sound like a sensible way to expand coverage. But in reality, an employer mandate is a huge new tax that would exacerbate the shortcomings of our current health insurance system and lead to fewer new jobs and lower wages.

Our system of tying health insurance to the workplace in the U.S. leads to many of the problems we have in our health sector. It’s why so many people lose their coverage when they lose or change jobs. Since the current recession began, more than five million people have lost their jobs — and it’s estimated that as many as 2.4 million have lost health coverage.

It doesn’t have to be this way, but locking health insurance to the workplace, as the president’s plan would do, guarantees this problem will continue.

Then there’s the damage done to the broader economy. The tax code today makes it economically advantageous for companies to offer health benefits to their workers, and economically disadvantageous for people to purchase insurance on their own. This fact has led to a situation in which around 60 percent of people under age 65 get their insurance at work.

That produces something called “job lock.” The risk of losing health insurance keeps people from leaving jobs in which they’re dissatisfied. Research shows this affects between 25 percent and 50 percent of the workforce.

This stifles business creation. As MIT economist Jonathan Gruber puts it: “Some of tomorrow’s potential entrepreneurs are today’s employees at firms that provide health insurance. They may have powerful new ideas that will build the firms of tomorrow. But if they leave their current job to work on those ideas, they may find themselves without access to reliable health insurance.”

The employer-based insurance system also is unfairly slanted against small businesses. Because bigger firms have more purchasing clout, they can purchase coverage for about 18 percent less than their smaller competitors.

What’s more, many small businesses can’t even afford to provide insurance in the first place. According to the Kaiser Family Foundation, fewer than half of businesses with three to nine workers provide coverage, versus 99 percent of those with 200 or more.

This disparity in insurance availability makes it more difficult for start-up firms to attract top talent.

Linking insurance to employment has also suppressed wages. Managers pass on increased health care costs directly to employees in the form of smaller paychecks. And higher health costs make it less likely that employers will hire new workers. Researchers at the Rand Corp. found that in 40 key industries, a 10 percent jump in health costs would translate into the loss of more than 120,000 jobs.

In other words, an employer mandate would stifle job creation and hurt wages, and could even lead to layoffs. Not a smart move, especially in the middle of a historic recession.

Instead of mandating that employers provide health insurance, President Obama should work to make health coverage more personal and portable. Doing so would reinvigorate the economy, blunt the effects of future downturns, and put more health care decisions in the hands of doctors and patients.