A new Yale study finds that mandate-based health care is the most cost-efficient form of universal health care.
The study, published by the National Bureau for Economic Research, examined workers’ wages in all 50 states before and after the Massachusetts universal health care bill was enacted in 2006. The research found that workers in Massachusetts were willing to take a wage cut in order to gain employer-based health care, making the mandate the most efficient form of universal health care. Independent experts say that this study should dispel fears that the national health care reform of 2010 will cause employers to stop offering insurance.
“This means that relative to other ways that you can expand health insurance, the individual mandate effectively makes people value health insurance more than they did before the reform,” said Amanda Kowalski, assistant professor of economics at Yale and co-author of the study. “It impacts the labor market less than other forms of health reform.”
The Massachusetts health care insurance reform law, which created the nation’s first individual mandate on health care, was passed in 2006. The authors examined workers’ employee status and wages in Massachusetts before and after the law was passed, using data from the 49 other states and the District of Columbia as controls.
They found that, after 2006, jobs that offered health insurance paid an average of $6,058 less than they did before the individual mandate went into effect. This large wage decrease indicates that workers valued their health insurance more after the reform went into effect, as they were willing to take a pay cut, Kowalski said. This is the case even though a firm’s penalty for not providing health insurance was only $295 per worker.
This system is more efficient than taxing wages to cover health care costs, because the money lost to a tax would force employers to either cut wages or eliminate jobs, Kowalski said. Under a tax system, employees would not recognize that their lower wages were contributing to their health care, and would thus be unwilling to work for lower pay. Kowalski said that the mechanism by which the mandate increases labor supply may either be unconscious or the result of union wage negotiations.
The study said that the deadweight loss of mandate-based health reform was less than 5 percent of what it would have been if the government had instead provided health insurance by levying a tax on wages.
Jon Gruber, professor of economics at the Massachusetts Institute of Technology, said that Kowalski’s paper provided evidence for a counterintuitive result.
“The main conclusion is that workers are willing to accept lower wages in order to get health insurance from their employers in the face of an individual mandate,” Gruber said. “This has the exciting implication that an individual mandate can promote employer-sponsored insurance coverage.”
Although the study did not examine the effects of the federal Affordable Care Act of 2010, Kowalski said that the national health care reform was likely to have a similar effect as the Massachusetts law, because both of them used an individual mandate instead of a tax.
“On the pure economics, because of the adverse selection and moral hazard, even conservative thinkers think that we need the mandate to work,” said Kenneth Chay, professor of economics at Brown.
Jonathan Skinner, professor of economics at Dartmouth, disagreed with the study’s distinction between a tax and a mandate. The mandate is effectively the same as the tax, in his view, because both are designed to make sure that people who are healthy contribute to the health insurance system.
Nonetheless, he said that healthy people benefit from a system of universal health care because if they get sick they are covered from the minute they step into the hospital. And if they remain healthy they also serve the valuable purpose of subsidizing the health care of the people who are sick.
“There’s a lot of fear that employers are going to stop offering coverage,” Kowalski said. “That’s not what we saw. We saw that about 6 percent of the Massachusetts population gained health insurance, and about half that new coverage was from employee sponsors.”
The Congressional Budget Office has estimated that the national healthcare reform will increase the number of non-elderly Americans with health insurance by roughly 34 million by 2021.