Reader Trent McBride reminded me to blog on Prop 72, one of the worst propositions Californians have had the chance to approve in years. Prop 72 would require large- and medium-sized employers to provide health insurance to their employees. Here is a post defending the proposition.
Here is the best-case scenario if Prop 72 gets passed: employers will provide health insurance, and then adjust wages and other benefits downward to compensate. They’ll be able to do this because any increase in size of the total benefits package will make more people willing to work, so an employer who already hires a given number of employees will be able to adjust wages downward and still attract the same number. The result will not, incidentally, just be a wash from the employees’ perspective. Why? Because if the employees’ most preferred benefits package (holding the overall cost fixed) included healthcare, employees could have already negotiated with their employers to provide it. They could have offered to accept lower wages in exchange for health insurance, for instance. The fact that they haven’t done so is strong evidence that they don’t prefer that option. (Of course, many employers already offer health insurance – they won’t be directly affected much by the law. For those who don’t, however, the argument above applies.)
But that’s a best-case scenario. It’s likely to be worse, for at least a couple of reasons. First, to the extent that employers are unable to alter the benefits package in the manner described above (say, because it’s mathematically impossible to lower wages enough to cover the cost of insurance), the mandate will act as a tax on employment. That’s true of any form of income tax, of course. But it’s true in an especially pernicious way with a mandate like this, which attaches to number of laborers instead of labor hours. That will induce employers to reduce their total number of employees while expanding the number of hours each employee is asked to work. In other words, the policy would tend to cause unemployment of some workers while shifting their hours to other workers.
Second, given the small-business exemption (one of the few saving graces of the proposition), there will be a tendency for employers to “bunch up” around arbitrary threshold defining the difference between “small” and “medium” businesses. If it’s defined at, say, 50 employees, expect to see lots of businesses with 49. Businesses may also find ways to start converting regular employees into “freelancers” or temps to get around the requirement.
Third, there’s a potential rent-seeking problem. The state legislature will have to define the set of benefits included in the standard benefits package (defined vaguely in the proposition as prescription drug, major medical, and preventive care). Lobbying groups representing the various medical fields will naturally press for the inclusion of their own specialties in the package. The package may start bare-bones, but eventually it will grow to include psychotherapy, chiropractic, dermatology, acupuncture, etc. As the package expands, the cost of insurance will grow, exacerbating the effects described above.