The Case Against Including A Free Rider Provision In The Merged Senate Bill

First Read is reporting that “Senate Democratic leader Harry Reid has a health-care reform bill ready and will send it to the Congressional Budget Office today for an evaluation of costs.” Insiders tell the Wall Street Journal that the measure will include an opt-out public option and a free-rider employer provision, similar to the one included in the Senate Finance Committee’s bill. Under the merged bill, “employers with more than 50 workers wouldn’t be required to provide health insurance,” the Journal writes, “but they would face fines of up to $750 per employee if even part of their work force received a government subsidy to buy health insurance.”

The policy is designed to protect businesses and their employees from the costs of mandate compliance, but for many progressives, it’s a solution looking for a problem — — that creates problems of its own. Progressives have long portrayed the free rider as a discriminatory policy that disadvantages lower-income workers and minorities. The well-respected Center on Policy and Budget Priorities (CBPP) has argued that since the free-rider mandate only requires employers to partly finance the coverage of lower income workers (workers who qualify for subsidies in the Exchange), it may discourage employers from bringing on new lower income hires:

It would make it considerably more expensive for employers who do not offer health insurance to hire workers from lower-income families. Employers would have strong incentives to tilt hiring toward people who have a spouse/parent with a good income. Poor parents with children in one-earner families would be particularly disadvantaged.

– Since minorities are more likely to have low family incomes than non-minorities, a larger share of prospective minority workers would likely be harmed.

This provision would be very complicated to administer. Employers would need to maintain ongoing data exchange with state health insurance exchanges.

A pay or play provision — which requires large employers to offer creditable coverage or pay a fine — is more equitable. The provision establishes the principle that while individuals should be responsible for purchasing health insurance coverage, large businesses that do not directly provide health care to their employees should pay into a public pool to help finance their employees’ coverage. The mandate enhances the existing system of employer-based coverage, levels the playing field between employers “that provide insurance and those competing with them that do not,” reduces “crowd-out of private coverage by new public programs,” and preserves the employer contribution — an important source of funding for health care reform. Large employers like Walmart, Target, and even the Business Roundtable have endorsed the mandate.


The Finance Committee considered the mandate option but ultimately rejected it, fearing that businesses would transfer the costs of the mandate into lower take-home pay for workers and job losses. But this is somewhat overstated. The overwhelming majority of American businesses would not face higher costs. The pay-or-play provision in the House bill, for instance, exempts some 87 percent of American businesses from any requirement, but ensures that large employers don’t drop their existing coverage. States — like Massachusetts or Hawaii — already require large employers to provide coverage and have found no evidence of reduced employment.

In a ‘pay-or-play context,’ some large employers would have to pay more under reform, but they would also see concrete savings. With increased access to care, all firms would benefit from the reduction in unpaid medical bills incurred by the uninsured and the savings due to a reduced rate of health-care cost growth and greater labor productivity. On the whole, the consequences of failing to reform health care reform far outweigh concerns about costs to businesses and low income workers. In fact failing to act would hurt the very same businesses and low income individuals that critics are trying to protect.

While the merged bill may include the free rider, Sen. John Kerry (D-MA) introduced an amendment to replace the provision with a pay-or-play mandate during the Finance Committee’s mark-up process and promised to debate the issue on the Senate floor.