Health reform mandates good for economy, says Yale economist

In a recently published report, two economists from Yale and the University of Pennsylvania demonstrate that mandate-based national health reform makes sense economically, extending affordable health insurance to some of the 50 million uninsured Americans without killing jobs.

While the Supreme Court is considering the constitutionality of the individual mandate provision of the Affordable Care Act as a tax, authors Amanda Kowalski of Yale and Jonathan Kolstad of Wharton demonstrate that the mandate does not have the same impact on the economy as a tax.  Although taxes on wages decrease wages and employment, mandate-based health reform need not decrease employment if workers value the coverage that they receive.  

The authors examine data on the labor market impact of the Massachusetts Health reform of 2006 (enacted under Gov. Mitt Romney), as a model for the ACA.  Like the Massachusetts health reform, the ACA mandates that individuals purchase health care or pay a penalty, while also offering a government subsidy to those who can’t afford to buy medical insurance directly.  The ACA also requires employers to provide their employees with access to health care benefits or pay a penalty (smaller businesses are exempt from the mandate).  

Employers, argue the authors, factor in what they pay in health care benefits in determining employees’ overall salary, and therefore would reduce the wages they offer future employees to compensate for the increased economic burden imposed by the ACA mandate.  However, if the workers are willing to accept the lower wages because they value health insurance coverage, employment need not decrease.

In this study, the authors focused on how the Massachusetts health reform affected wages and employment for individuals who enrolled in health insurance offered by their employers.  Compared to similar individuals in other states, their wages fell, but their hours and overall level of employment remained the same.  On average, workers who gained coverage through their employers saw their wages fall by $6,058, relative to what those same individuals had earned before the reform.  The wage decline is just under the average cost of health insurance to employers. 

“Our study shows something that economists have claimed for a long time but have not been able to show definitively – although your employer pays the bill for your health insurance, you actually reimburse your employer for those expenses by accepting lower wages,” says Kowalski.

The authors find that absent the reform, individuals would not have purchased coverage from their employers because they did not value it enough to do so, but the penalty increased their valuation.

Looking at how the Romney reform affected the “fence” sitters in Massachusetts, Kowalski and Kolstad conclude that the penalty for not purchasing insurance coupled with the benefits of having health-care coverage, tipped the balance for uninsured employees and made lower wages acceptable to them.  The same could happen under the ACA, provided that the individual mandate is upheld by the Supreme Court.