The Cost of California’s Health Insurance Act of 2003

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California's recently passed Health Insurance Act of 2003 (HIA) is an extremely costly mandate on employers to provide health coverage for all of their employees. HIA applies to all businesses with more than 20 employees and requires employers to either provide private health coverage or pay into a state fund providing insurance for the working uninsured. This study estimates that HIA will cost California employers nearly $11.4 billion dollars.

Where possible, employers will react to HIA by shifting costs onto workers in the form of lower wages. In the case of the least skilled workers, however, wage shifting is simply not an option. Current Population Survey (CPS) data show that due to the California minimum wage, employers will be unable to shift the cost of the mandate onto 550,000 employees. These employees are at risk of losing their jobs, either through labor force cuts or competition from more experienced workers attracted by the new benefits. Either way, the least skilled workers could find themselves out of the labor force.

The study reveals that nearly 25% of the 6.7 million uninsured Californians are children. Nearly every one of these uninsured children currently qualifies for nearly-free medical coverage from the state government. An increase in government outreach to the families of these children would virtually eliminate the problem of uninsured children—without causing unintended consequences for low-wage workers.

A large number of the uninsured do not work at all, or do not work enough to qualify for HIA coverage. As a result, over 65% of uninsured Californians more than 4.4 million people will remain uninsured. In addition, HIA mandates coverage for a large number of employees who already have health care (including individuals who have chosen to purchase private insurance and people with government-provided insurance). Only a minority of individuals affected by HIA will receive new coverage. This creates extreme waste, whereby only 40 cents of every dollar of increased HIA expense actually goes to providing coverage to the currently uninsured.

HIA contains a poorly targeted poverty subsidy for individuals with high family incomes. The legislation specifies that individuals with wages below 200% of their respective federal poverty level (a family of three for family coverage, individual for all others) cannot pay more than 5% of their wages for health coverage. The subsidy is based on individual earnings and not family income which is a more accurate predictor of poverty. As a result nearly 160,000 individuals with a family income over $100,000 and over 700,000 individuals with a family income of $50,000 will receive this subsidy for the poor. In total, over 43% of subsidy recipients will have family incomes over 200% of their respective poverty level.

The estimates of coverage and their associated costs contained in this study, are significantly higher than other publicly released estimates because other estimates ignore several categories of individuals. These groups include employees currently receiving government insurance or choosing to pay for their own non-employer based case—groups specifically covered under HIA. Excluding these large categories of people, and assuming that all employer-provided insurance will meet the rich mandated benefits of the “play” portion of HIA creates a false representation of the cost and impact of this mandate.