Baucus’ Free Rider Provision

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"Baucus’ Free Rider Provision"

I’ve raised concerns in the past about Max Baucus’ preference for a “free rider” provision instead of an employer mandate. The way an employer mandate would work is that every employer with more than such-and-such number of employees would either need to offer health insurance to its employees or else would have to pay a fee. The fee would provide the government with revenue that helps offset the cost of subsidies for the uninsured to get insurance on the individual market. If you were designing a system from scratch, instead of doing this you would have a payroll tax on all employers and use the money to offer subsidies to everyone. But since we don’t want to start from scratch, and also don’t want to disrupt people’s existing coverage, the employer mandate more-or-less accomplishes the same stuff.

Instead of that, though, what Baucus (apparently at the behest of Olympia Snowe) wants to do is just put a special fee on employers who don’t offer insurance whose employees are subsidy-eligible. Instead of something that resembles a payroll tax, this is basically a tax on employing poor people. Ezra Klein explains that this has now been tweaked in a strange way:

The employer doesn’t just pay $400 per low-income employee. He pays “$400 multiplied by the total number of employees at the firm (regardless of how many are receiving the state exchange credit).” The bill actually gives an example of how this works: Employer A has 100 employees and does not offer health-care coverage. Thirty of the employees receive subsidies on the exchange. Employer A doesn’t pay $400 x 30 employees, but $400 x 100 employees, for a total of $40,000.

Ezra calls this “one of the worst policy ideas I’ve ever seen. It creates a huge incentive to build a workforce that entirely excludes low-income workers.” Maybe. Another way of looking at it is that arguably making it $400 * X makes the plan look more like a straight-up employer mandate rather than a special tax on employing low-income individuals. Another thought is that this is going to create a lot of incentives to fiddle with corporate organization. If I employ 100 people, of whom 20 are subsidy-eligible, it’s now going to make a lot of sense to see if I can’t set up a separate firm that employs 20 people, is wholly owned by me, and contracts with a second me-owned firm that employs the other 80 people.

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Check out CBPP’s statement on this:

Also problematic is the plan’s “free rider” provision, which would require employers who do not offer health coverage to pay substantial amounts for low- and moderate-income employees who receive subsidies to buy coverage in a health insurance exchange — but not to pay anything for employees who do not get subsidies. (It also would require employers who do offer coverage to pay if some of their workers receive subsidies because the employers’ coverage is not considered affordable for them.) And by requiring employers to pay extremely large amounts for hiring individuals who receive subsidies for family coverage in the exchange, the provision would make it harder for some lower-income parents with children to find jobs. This provision also would place significant administrative burdens and costs on employers because it would be complex to administer.

Their more formal analysis of the “free rider” issue is also worth reading.


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,A bunch of stuff is struck out now, as Ezra misunderstood it. His post is now corrected. Unfortunately, the truth doesn’t solve the problem:

So in the scenario where Baucus Corp. has a lot of low-income workers, they cost a huge amount overall because they’re multiplied against the total number of workers. In the scenario where Baucus Corp. has a few low-income workers, they cost a huge amount individually because they’re multiplied against the average subsidy cost. No matter how you look at it, the policy makes it profitable for employers to discriminate against hiring low-income workers.

Normal employer mandate would be better.


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