Now the really hard work begins.
The health care exchange legislation just passed was a small precursor to the next item of business in health care reform, scheduled for the 2013 session: financing of Green Mountain Care single-payer health care. Chief among the challenges will be how to pay for a universal coverage plan without overburdening small businesses. An employer payroll tax is often cited as a financing source because it would replace the $1.35 billion Vermont employers already contribute toward private health insurance as a fringe benefit for their employees.
Unless such a payroll tax is significantly graduated — meaning a sliding scale rate that increases as the size of the employer gets bigger — small businesses will see a substantial increase in their health care costs even if large savings are generated by Green Mountain Care for the health care system as a whole. That, at least, is the strong indication from a recent private consulting study.
As unorthodox as it may sound, the private labor and insurance markets in Vermont have worked together to create a system of employer contribution toward private health insurance that is steeply graduated. This is because two-earner households tend to get their insurance from the larger of their respective employers. As a result, employers do not contribute to private health insurance in the same proportion to their size or their payroll.
This should make intuitive sense from your own experience. Where do you or your friends tend to get your health insurance? If one earner works for a large employer such as the state, IBM, the local school district or municipality, or a college or university, that is the one from whom you are likely to get your insurance, and not from the small business where the other works. As a result, a larger percentage of the employees working for larger firms end up taking the offered coverage. Those larger firms end up covering spouses who are employees of smaller firms and their dependents, who, under federal law, can now stay on the family plan until age 26. Some employers actually pay a bonus if the employee gets insurance from the spouse’s employer.
Consequently, small employers who offer health insurance nevertheless enjoy a substantial cross subsidy from large employers. According to this consulting study, Vermont firms with more than 100 employees account for one-third of total private employment but shoulder a whopping three-fourths of the total private insurance burden. In terms of payroll, there is almost an inverse relationship between the share of private payroll and the share of people privately insured: Sixty percent of the payroll pays toward only 22 percent of the insurance load.
This in turn has created a system of progressive premium contributions from employer payrolls whereby small firms (fewer than 100 employees) that offer insurance pay about 5 percent of their payrolls toward health insurance premiums, while large employers (with 100 or more employees) are paying nearly 20 percent.
A much overlooked portion of the 2011 report of Harvard economist William Hsiao acknowledged that small businesses would be significant losers and large employers significant winners under flat-rate payroll tax financing. This more recent consultant’s study would appear to confirm that a flat payroll tax will be a nonstarter. The Legislature will have to either fashion a sliding scale payroll contribution or come up with some alternative source of financing altogether.
John Franco is a Burlington attorney who has been active in health care reform for more than 25 years.