Health Reform and Job Destruction

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WASHINGTON-As the Senate turns to passage of its version of health care "reform," members must consider how to avoid the misguided job-killing provisions of the House's Affordable Care for America "guaranteed unemployment" bill.

Passage of the House bill Saturday night came a day after the Labor Department reported that the national unemployment rate rose to 10.2%, a 26-year high, with another 190,000 payroll jobs lost. Including discouraged workers, those working part-time for economic reasons, and those marginally attached to the labor force, the Labor Department measured the unemployment rate at 17.5%.

Even though American workers need jobs, the House bill would discourage hiring and result in lower take-home wages. Small business tax increases would take effect on January 1, 2011, and regulations on health insurance and the employer penalties and mandates would become fully effective on January 1, 2013.

The job-killing provisions of the House bill include:

Employers would be required to offer health care for workers. This requirement would cover employers with at least $500,000 in annual payroll costs, and it would add to employment costs for workplaces that don't now have the prescribed set of health benefits. All covered employers would have to pay 72% of premiums for single workers or 65% for families. Workers who were not laid off would receive lower wages to compensate for the higher benefits.

The House bill also prescribes what constitutes a qualified benefit plan. Such coverage would be expensive. The House prohibits copayments for routine visits, such as annual check-ups and mammograms, and requires coverage for mental health and substance abuse, and dental care for children.

Employers who don't offer health insurance would pay a fine. An employer with $750,000 or more in payroll who did not provide the right kind of health insurance would pay 8% of payroll. (Between $500,000 and $750,000 in payroll, employers would pay fines of 2% to 6%.) That would raise labor costs, discourage hiring, and lower wages in an economy in which employment recovery even now is predicted to be slower for years.

Someone who earned $1,000 per week, approximately median income, would cost his employer an additional $80 per week, or $4,160 per year. Multiplied by 20 workers this adds up to $83,200, not exactly an incentive to take on more workers. Some employers would cut pay, and others would hire fewer workers.

Income taxes on the most productive small businesses would increase, making them less willing to hire. The top tax rate on business owners who pay taxes as individuals, not corporations, now is 35%. It's already scheduled to go up to 39.6% on January 1, 2011, and under the House bill it would rise even higher, to 45% on taxable income of $500,000 for singles, $1 million for couples. With state taxes, some combined rates could exceed 55%. That has to discourage hiring and encourage retrenchment and use of contractors.

Expansion of Medicaid would burden state budgets. At a time when most states can least afford it, the bill expands Medicaid eligibility to 150% of the federal poverty line from 133% now. This would saddle states with an additional $34 billion in obligations, resulting in higher taxes or layoffs of state employees and contractors.

The Senate might begin debating its version of health care "reform" next week. It must merge bills from two committees, Labor and Finance. Once passed by the Senate, that bill would have to be reconciled with the House bill in conference.

The Finance Committee bill funds health reform not through income tax hikes, but through taxes on expensive health insurance plans and cuts in Medicare spending, cuts that may be unrealistic. Penalties on employers who do not insure their workers are milder than in the House plan, "only" $400 per worker.

The more expensive and generous health care plans would face an excise tax of 40% on premiums above $8,000 for singles and $21,000 for families. Health insurance premiums now average $4,824 for singles and $13,375 for families but would rise substantially in the future by 10% or 15%, according to the Congressional Budget Office.

One reason to expect increases is the prohibition on insurers turning away sick people. While this prohibition is well-meant, to protect the unlucky, it will have economic consequences-higher premiums for all.

As Harvard University economist Martin Feldstein has shown, the penalties for not signing up for health insurance--$750 per person-are so mild that it will pay people to wait until they are sick to get insurance. This will mean higher costs for underwriters and further premium increases. As premiums rise, more people will drop out, choosing instead to pay the fine.

The proposed taxes on expensive policies are meant to discourage employers from providing a large tax-free benefit to workers. While that is a worthy purpose, the law prevents individuals from switching to lower-cost plans by forbidding high-deductible low cost plans. Since the mandated qualified plans are overly generous, middle-class Americans would just be sitting ducks for the tax collector, just as they are now paying an increasing share of the alternative minimum tax.

Although the Finance Committee bill does not contain the tax increases on small business found in the House bill, the increases in premiums would gradually raise the amount everyone would have to pay for health insurance, leaving less disposable income to buy other goods and services. Rather than bending down the health cost curve, the economy would be stifled by rising health insurance premiums.

The primary crisis facing Americans today is joblessness, with its associated costs of bankruptcy and foreclosure on homes. An undue emphasis on health "reform" to the detriment of jobs could cause some members of Congress to join the ranks of the unemployed after next year's election.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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