Universal Access to Health Care in Pennsylvania-

“Cover all Pennsylvanians” Economic and Small Business

Effects

bruce.phillips@nfib.org

NFIB Research Foundation, Washington, D.C.

September 2007

Executive Summary• The state of Pennsylvania will provide access to health insurance for 767,000

uninsured workers. These represent about 60 percent of total uninsured

• Participation will be voluntary, but encouraged through low-cost state purchasing pools for employers with 2 - 49 employees

• Employers will pay 65 percent of estimated $300 monthly premium or $195 per month per employed participant

• Pennsylvania will provide subsidies to workers and dependents with incomes under 300 percent of the Federal Poverty Level, or about $60,000

• Employers not offering health insurance to any employee must pay a three percent payroll tax, estimated at $822 million and enforced by the state

• An estimated 50 percent of small employers will pay the tax

Executive Summary (2) • Small business owners will pay payroll taxes, insurance premiums, accounting costs,

and insurance search costs of an estimated $1.9 billion annually after startup

• Annual state costs of $1.9 billion include employee subsidy costs, health care expansions (clinics, nurse practitioners, physician assistants, etc.), new regulatory costs of about $100 million, and an expanded role of state government

• The BSim model estimates that Pennsylvania businesses will lose 167,000 jobs from the proposal within five years of startup, 2008 through 2012

• 103,000 of the jobs lost will come from small employers, especially those with fewer than 100 employees

• Pennsylvania small employers will lose an estimated $10 billion in sales from 2008 through 2012

• Small-business owners with 20 - 99 employees will lose an estimated $157,000 in sales, on average, over the five years, 2008 - 2012

The Proposal - Overview

. To provide access to health insurance for Pennsylvania’s 767,000 uninsured working-age persons and their dependents

• Employees in firms with 2 - 49 employees without insurance will have access to the state’s large purchasing pool through a modified form of community rating, if owners pay at least 65 percent of the state discounted premium and if 75 percent of a firm’s full-time employees participate

• Newly insured could be persons without previous health insurance or those who switch to state plan

• Subsidies available for workers with income less than 300 percent of Federal Poverty Level (FPL) and wage rate below state average of $39,000

• Payroll tax of 3 percent on all employers who do not offer any health insurance • Employers receive a 3 percent tax credit if they currently offer health insurance

The Proposal – Who Benefits?

• Any uninsured individual may participate in the state’s program at an unsubsidized, non-discounted basis

• There are an estimated 767,000 uninsured workers in the labor force • Employed persons in firms with 2 - 49 employees (428,906) comprise 56 percent of

working uninsured - remainder in larger firms

• The state program mandates coverage for ambulatory health care, prescription drugs and mental health benefits

• Students at four-year colleges and universities in Pennsylvania must have documented evidence of insurance coverage to continue studies. State program available to them if no other source

*Endnote A

The Proposal - Financing

• Three percent payroll tax imposed on non-offering employers will raise about $882 million

• Estimated 70 percent in state insurance pool will be subsidized - either

workers or Medicaid recipients

• Seventy-five (75) percent of full-time employees (30+ hours/week) must enroll in state insurance plan for employer to be able to offer it

• State funds (estimated $3.5 billion) will be saved from eliminating hospital-

based chronic infections according to proposal and returned to program to partially fund it

• Additional monies to come from state share of tobacco settlement funds

and reprogrammed Community Reinvestment Act funds

Distribution of Monthly Premium if Eligible for State Insurance

• Employer pays 65 percent of $300 estimated monthly premium = $195 monthly per employee

• Employee pays 25 percent of $300 estimated monthly premium = (estimated) $75 monthly per employee*

• State pays 10 percent of $300 estimated monthly premium = $30 monthly per employee

n * Sliding range of $10 - $75 based upon income

EmployerEmployeeState

Employer Tax @ Three Percent of Annual Payroll-if must pay*

Firm Size- Offer No. of Firms Employees Tax Per Firm:(Employees/Firm) Rate (pct) (mean/firm)

1-4 44.4 74,824 2.1 $1,538 5-9 61.0^ 17,055 6.5 $5,110 10-19 77.5 5,971 13.4 $11,415 20-99 92.7 1,716 37.8 $34,942 100-499 96.5 183 145.2 $135,972 500+ 99.9 4 665.2 $735,464 *Endnote B for derivation of tax ^ = offer rate assumed for the unobservable 5 - 9 employee size class Assumed rate is the

average of the 1 - 4 and 10 - 19 employer offer rates. Source of offer rates is the 2005 Medical l Expenditure Panel Survey, U.S. Department of Health and Human Services. Data kindly supplied by Dr. Jonathan Gruber Dept of Economics, MIT.

The Proposal - Administration

Program Administration

• Administration will cost $70 million annually (state estimate), about 14

percent of estimated first year employer cost of $882 million*

• Employers that qualify for exemption from payroll tax must establish section

125 plan so employees can pay insurance premium on “pre-tax” basis

* Includes startup payroll taxes, regulatory expenses, administrative costs and employer health insurance search costs.

The Simulation

. The NFIB/BSim Simulation model only applies to mandates placed upon employers*

• BSim is a module of the REMI input-output model

• BSim estimates changes in jobs, income and output (sales) for Pennsylvania by state total, business size and industry

• Estimates are made comparing forecasts without change to forecasts with change (i.e., the proposal)

• Projections run from 2008 - 2012

• BSim also measures effects in other regions and states caused by policy changes in Pennsylvania, e.g., jobs lost or gained in other states and the U.S.

* Endnote C

Simulation Summary: Jobs

• Pennsylvania loses an estimated 167,000 jobs during the first five years after enactment (2008 - 2012)

• Small firms (under 500 employees) lose 103,000 jobs during 2008 - 2012, 62 percent of the total loss

Simulation Summary: Small Business Jobs

Small business in Pennsylvania (less than 500 employees) lose 103,333 jobs from 2008 - 2012.

The distribution of job loss by firm size averages:

% All Em- % All Job % Diff- % All Em- % All Job % Diff- Firm Size ployees* Losses erence Firm Size ployees* Losses erence

1 - 4 employees 4.7+ 6.8+ 144 20 - 99 employees 17.5 22.5 127 5 - 9 employees 5.7 7.7 135 100 - 499 employees 14.6 15.6 -8810 - 19 employees 7.0 9.2 131 500+ employees 50.5 38.2 -75

*Endnote D+Detail may not add to 100.0 due to rounding

Simulation Summary: Job Loss/Gain by Selected Industry, 2008 - 2012

Losses1. Retail Trade -30,6352. Food Services -26,4603. Prof, Technical Services - 9,1534. Administrative Services - 8,8915. Social Assistance - 6,404

Gains 1. Nursing, Residential Care + 3,219 2. Ambulatory Care + 3,107 3. Hospitals + 1,680

Simulation Summary: Output Changes (Billions of Year 2000 Dollars)

• All Pennsylvania firms lose $19.2 billion in sales from 2008 - 2012

• Pennsylvania small firms (under 500 employees) lose $10.5 billion in sales from 2008 - 2012

• Pennsylvania small firms (10 - 19 employees) lose $1.4 billion in sales by 2012, or about $52,760 per firm

Data Inputted Into the Model(in addition to baseline data already present)

• Non-Wage Labor Costs (aggregated by firm size and category) for projection period

• Distribution of employer receipts by sector—from the $882 million payroll tax for projection period

• Estimated $70 million cost to run new state agency—included in administration costs from tax receipts

Insurance Costs

• Insurance program uses $882 million of employer payroll taxes annually, excluding subsidies for employee premiums*

• About 46 percent of Pennsylvania employers with 2 - 49 employees will likely pay the payroll tax based on current insurance offer rates by firm size

• Simulation assumes full employer compliance in first year of program^

* Endnote E^ Simplifying assumption used for calculations only. See further details under “Limitations.”

Owner Annual Administrative Costs*

• Accounting Costs - Assume 5 hours per employee at $35/hour (i.e., a four person firm = $175 x 4 =$700). Includes modifications to computer software

• Owner Insurance Evaluation Costs - Assume 10 hours per firm/owner per year @ $75/hour = $750 per firm

* Hourly rates based upon William J. Dennis, ed., National Small Business Poll, “Paperwork and Record-keeping,” 3(5), 2003, (NFIB Research Foundation, Washington, D.C.). Number of hours based on assumed quarterly re-evaluation of health insurance needs and costs. Data for insurance evaluation costs also used from forthcoming research on firm/owner search methods.

Estimated Annual Employer Costs-Year 1

Firm Size:

(Employee/ Firm)

Payroll Tax/Firm

Admin./

Accounting Costs/Firm

Insurance/

Search Costs/Firm

Total Costs/Firm

1 - 4 $1,538 $368 $750 $2,656

5 - 9 $5,110 $1,138 $750 $6,998

10 - 19 $11,415 $2,345 $750 $14,510

20 - 99 $34,942 $6,615 $750 $42,307

100 - 499 $135,972 $25,410 $750 $162,132

500+ $735,464 $116,410 $750 $852,624

Estimated Recurring Employer Costs-After Startup

Firm Size:

Employees

Insurance

Costs*

(based on $2,400 cost/employee in state program)

Insurance Search Costs

Accounting

Costs

Sum: Costs per Firm

1 – 4 $4,149 $750 $368 $5,267

5 – 9 $6,069 $750 $1,138 $7,957

10 – 19 $11,122 $750 $2,345 $17,217

20 – 99 $57,779 $750 $6,615 $68,144

100 – 499 $12,500 $750 $25,410 $41,660

*State insurance program only applies to firms with fewer than 50 employees

Total Small Business Owner Costs

• Year 1 = $882 million

• Year 2 - 5 = $4.116 billion (cumulative)

• Years 1 - 5 = $4.998 billion (cumulative)

Procedure for Simulation- Industry Distribution of Funds Spent by State

from Employer Payroll Tax

Industry % of Tax $ Millions

Hospitals 30 150

Nursing & Patient Care 14 70

Ambulatory Care 29 145

Health Insurance 13 65

State Administration 14 70

Total 100 500*

* Endnote G

Number of Firms that Offer State Program (and Pay Payroll Tax)*

Firm Size: No. of Firms Tax/Firm Total (employees/firm) (1) (2) (1)x(2)

(000)

1 - 4 74,824 $ 1,538 $115,079 5 - 9 24,314 $ 5,110 $124,244 10 - 19 5, 971 $ 11,415 $ 68,159 20 - 99 1,716 $ 34,942 $ 60,012 100 - 499 183 $135,972 $ 24,883

500+ 4 $735,464 $ 2,942

*Based on firms not offering health insurance in 2005 Medical Expenditure Panel Survey data

Comment: Incidence of Losses

• Job losses in Pennsylvania’s labor intensive industries are disproportionately in small firm dominated sectors like retail trade, restaurants, professional services and construction

• The payroll tax is not a “fair share” tax. When compared with the

distribution of employment in Pennsylvania, larger firms lose about 25 percent fewer jobs than “expected” based on their existing share of Pennsylvania's employment

• The smallest firms lose about 40 percent more jobs than “expected” on an aggregate basis

Estimated Annual Total State Costs (1)

• Estimated total annual state costs at startup estimated at $1.9 billion—includes expansion of Medicaid program financed by federal funds, small business subsidy costs, regulatory costs, new administrative costs, new costs of ambulatory care, hospital clinics, etc.

• State government subsidy costs to workers and dependents estimated at $700 million

annually*

• Expansion of clinics, additional nurses, electronic health transfers, etc. estimated to separately cost $200 million annually

• About $100 million annually separately assumed in new administrative and regulatory costs

* Based upon CPS data (2003-2005 averages) by poverty level of the uninsured, prepared for NFIB Research Foundation by the Employee Benefit Research Institute under contract, March, 2007. Subsidy calculated from Lewin report and CPS data by income level to average approximately $100/person/month.

Estimated Annual Total State Costs (2)

• Startup incentive credits to small employers (2 - 49 employees) from state government to encourage participation: $60,000 year 1, $48,000 year 2, $39,000 year 3, $31,000 year 4, $4,000 years 5+*

Initial cost to state is $ 6.42 billion excluding federal funds - (based upon 99,800 small firms participating with 2 - 49 employees)

Revenue sources do not cover costs

• New ambulatory care, nursing, hospital costs (from payroll tax collections)= $880

million

n * Assumed in proposed state 2007 - 2008 budget. Details somewhat vague when first released in late January, 2007. Credits were not modeled due to lack of budget specifics

References• Commonwealth of PA, “2007-2008 Budget In Brief.” Harrisburg, PA,

February 6, 2007

• Mercer Consulting, Inc. “Cover All Pennsylvanians Analysis and Methodology.” Phoenix, AZ, February 26, 2007

• Commonwealth of PA, Office of the Governor, “Governor Rendell Unveils Historic Prescription for Pennsylvania to Provide Access to Affordable, Quality Health Care for all Pennsylvanians,” Press Release, January 17, 2007

• “Summary: PA Health Care Reform Act,” Chapters 72-75 of Title 40,

Internet download, April, 2007 • NFIB/PA, PA Chamber of Business and Industry, The Hospital & Health-

system Association of PA, “ “Governor Rendell’s Prescription for Pennsylvania.” Power-point slide show, prepared March, 2007

Limitations

• Errors are solely the responsibility of the author.• • Because there are presently large gaps in the funding needed for

this program, over and above those already proposed, it was assumed the funds saved from the reduction in hospital acquired infections ($3.5 billion), would still be available to the hospital sector, presumably from additional state sources.

• Compliance rates do not vary in the BSim model. Therefore, complete compliance is assumed by all small-business owners at the inception of the CAP program. In reality, this is unlikely to be true; compliance generally follows an asymptotic exponential covering 2 - 3 years after the effective date of a given regulation.

Endnotes

A. It is not clear how saving $3.5 - $6 billion from eliminating hospital-based infections and other disease prevention measures translate into additional funds at the startup of this program. While it is possible that better management of hospitals and clinics will save money in the longer term, it is not likely that funds of this magnitude will be immediately available unless they are federal grants.

B. 2004 payroll data (latest) by firm size and state from the U.S. Small

Business Administration (SBA). Number of firms by employer size class also from SBA. Results were multiplied by .03. Some interpolation was necessary because data for firms with 20 - 99 employees did not match those with 20 - 49 employees. Size class means were derived and used as proxies.

C. Business Size Insight Model, Prepared by REMI, Inc. under contract to

the NFIB Research Foundation, 2006

D. Employment distributions by state from www.sba.gov/advo/research. Last historical year was 2004.

Endnotes (2)E. It is assumed that Pennsylvania will spend any payroll taxes collected from

small employers directly on health. However, funds for subsidies are assumed to be available from the Pennsylvania Medicaid program, either directly as a pass through from the federal government or from reprogrammed state funds.

F. Amount of actual spending is likely understated due to unknown amount of Medicaid/State government funds for subsidies and subsequent increased participation by families below the Federal Poverty Level. Amounts assumed here are conservative. Percentage distribution of health expenditures by category based upon “Estimates of the Cost of Coverage Impacts and How to Expand Health Insurance in New York,” prepared by Lewin Group, Arlington, Virginia under contract to the Commonwealth Fund, New York, draft December 14, 2006. A similar distribution exists for California from both the Lewin and Mercer consulting firms.

G. Difference between $500 million tax receipts spent immediately and $882 million collected is a holdback for unanticipated expenses and higher state administrative costs than expected.

Acknowledgements

• Revisions to earlier drafts due to the incisive comments of William Dennis, NFIB Research Foundation, Gabor Lukacs, REMI, Inc., Fred Rueter of CONSAD Research and Kevin Shivers of NFIB

• Thanks are also due to Jonathan Gruber of MIT for making health offer rates by firm size and state available, and to Ken McDonnell of the Employee Benefit Research Institute for tabulations of the uninsured from CPS data