Health care reform: Distributional consequences of an employer mandate for workers in small firms

During the 1993-94 health care reform debate, small employers expressed concern about the financial burden a mandate would impose on them because their workers comprise a disproportionate share of the uninsured. Data from the 1987 National Medical Expenditure Survey are used to simulate the distributional effects of the 1993 Health Security Act. The results reveal why small employers were vehemently opposed to a mandate, even assuming that workers would bear the full incidence of the mandate.; An employer mandate would have important effects on labor markets, leading to a deterioration in wages among small firms and changes in wage compensation for workers relative to staying out of the labor force. Workers in large firms, in contrast, would see wages increase as the cost of insurance to their employers declined. The combined effect would have likely induced labor to flow from small to large firms. The mandate would have also reduced wages (or other fringe benefits) to provide coverage that some workers already had through their spouse. This would have likely reduced labor force participation (roughly 250,000 workers), especially among secondary workers and workers with weak attachments to the labor force. To avoid the loss of workers to large firms or out of the labor force, small firms would have been required to raise wages.; Using firm size and average payroll, one-quarter of all subsidies would go to workers in small firms with annual household incomes greater than {dollar}42,000 and 36 percent to firms that previously provided coverage. In contrast, workers at the low end of the family income distribution would receive larger mean subsidies under an individual mandate. Improved targeting would minimize total subsidies required and reduce distortionary effects associated with taxing individuals to finance the subsidies; yet, it would likely distort behavior by adding a large amount to marginal tax rates as subsidies are phased out with increasing income.; Any mandatory financing scheme would involve distortions from the status quo. The policy choice is between distorting labor markets and the organization of firms (under an employer mandate) or individual behavior (under an individual mandate).