'Mischief' may greet health reform Schemes to cut costs highly likely

WASHINGTON — WASHINGTON -- As President Clinton prepares to introduce his health-care legislation to Congress today, the reform plan is likely to have some unexpected side effects, from splitting up companies to cutting the welfare rolls, from increasing manufacturing jobs to curbing part-time work and boosting early retirement.

Although the precise effects will not be known until -- and unless -- the plan becomes law, one thing seems clear: Companies are bound to look for ways to avoid the costs of the plan, which would force employers to pay 80 percent of insurance costs and employees to pay the remaining 20 percent.


Imagine this: a company splits itself into two parts, putting its high-paid workers into one group, its low-paid workers into another. Why? To take advantage of the subsidies the Clinton plan offers to small, low-wage companies.

"The amount of mischief that will be done by such perverse incentives is hard to quantify, but . . . is sure to be substantial," Mark V. Pauly, chairman of the Health Care Systems Department of the University of Pennsylvania's Wharton School, told the Senate Labor and Human Resources Committee last week.


Dr. Pauly cited a company of 100 workers halving itself into a company with employees earning around $40,000, and another with workers earning around $15,000. Both the original company and its workers would benefit from the split.

If the company had stayed whole it would have paid 7.9 percent of its payroll on health coverage. By splitting in two, its costs for the lower-paid company would be as little as 3.5 percent, with the government picking up the difference. Although the higher-paid group would still cost 7.9 percent of payroll, the company overall would have saved money on its health premiums.

Why would workers gain from their companies paying lower health premiums? Because any extra cost is almost certain to be passed back to them through lower pay, fewer benefits, or actual job loss. The lower the cost, the less the negative impact.

The only losers in the change would be taxpayers, who would pay the subsidy to help cover the workers in the artificially created small, low-wage company.

Advocates of reform argue that whatever the consequences, intended or unintended, they are preferable to the economic cost and social inequities of the current health care system, which threatens to break the national bank while leaving 37 million Americans without health coverage.

Health care currently consumes 14 percent of the value of the nation's total output of goods and services, the highest proportion in the industrial world. Without reform, the Clinton administration believes the proportion will increase to 18.9 percent by the end of the decade, costing jobs and making U.S. companies less competitive.

"We look at this [present] system and we see this has very bad consequences for the labor market," said Gary T. Burtless, labor economist at the liberal Brookings Institution.

Ripple effects


There is little argument that radically reforming such a huge system would send ripple effects throughout the economy, both positive and negative.

Universal coverage could cut the country's welfare rolls by eliminating the fear that Medicaid benefits would be jeopardized if the recipient were to earn an income. The administration estimates that 1 million welfare recipients currently avoid employment for fear of losing Medicaid benefits.

The Clinton reform plan also could produce a shift from lower-paying service jobs to higher-paying manufacturing jobs, according to a study yet to be released by the labor-backed Economic Policy Institute.

The new analysis predicts an increase in manufacturing employment because the high health costs of many major manufacturers would be significantly reduced under the Clinton plan. These companies are often charged higher premiums, indirectly paying the health care costs of the uninsured -- a practice known as cost shifting.

"It's got to have a stimulative effect as manufacturers' costs get more in line, and that will either be seen in lower prices, more jobs, higher wages, higher profits which mean more taxes, or probably all of the above," said Walter B. Maher, director of federal relations for Chrysler Corp.

In lower-paying service industries, such as fast-food businesses, which frequently offer no benefits, costs would rise and the work force might shrink or prices might increase.


"This business is highly competitive and extremely sensitive to price," said Walt Riker, spokesman for McDonald's, which has 9,000 restaurants nationwide, most owned by individual franchisees and employing between 50 and 75 workers. "Any time you add costs to doing business you are going to put pressure on the bottom line, and very likely on the jobs front."

Labor shuffle

Ironies abound in the reform proposals. Example: it would be more expensive for a large company to hire a low-skilled worker than a small company to hire a high-skilled worker.

The reason is that with the large company's basic insurance outlay capped at 7.9 percent of payroll, the health coverage cost of a $15,000-a- year secretary would be $1,185 a year. With a small company's cap set at 3.5 percent of payroll, insurance for a $30,000-a-year computer programmer would be $1,050.

"It will have peculiar effect on distribution of labor across the board," predicted William A. Niskanen, chairman of the free-market Cato Institute. "It will mean, for example, it will be cheaper for McDonald's to pay their managers more, and it will be more expensive for a law firm to pay their file clerks more."

Part-time jobs would suddenly become more expensive if employers are hit with pro-rated insurance costs for workers who previously enjoyed few or no benefits. Employers might decide that one full-time employee was preferable to two part-timers, a decision that could particularly hurt the job prospects of women with children, some of whom prefer part-time work.


"Somebody is going to have to pay it, whether it's the corporations they are working for or the temporary agencies they are working for," said Carl Wright, president of Don Richards Associates, a Baltimore employment agency. "I do think [companies] will use less temporary work because the costs are higher."

Impact estimates vary

But Mitchell S. Fromstein, president of Manpower Temporary Services Inc., pointed out that his company operates in 38 countries, 37 of which already have national health schemes that have not undermined temporary employment prospects.

Estimates of the nationwide impact on overall employment range from a small net gain to a loss of millions of jobs. The administration projects a limited overall change of about 600,000 jobs, but does not know whether it will be positive or negative.

The real crunch would come for companies that do not currently provide insurance coverage for their workers. Including the administration's proposed subsidies, the company could find itself paying between 15 cents and 33 cents an hour for health insurance for a worker earning the minimum wage of $4.25, depending on the size and wealth of the firm. The Wharton School's Mark Pauly estimated that 2.2 million low-wage workers could be priced out of the labor market by the mandated employer health contribution.

Another shift would be an increase in early retirement, either forced or voluntary.


Under the Clinton plan, the federal government would eventually cover 80 percent of the cost of health insurance for early retirees. This concession would be a windfall for large corporations, particularly auto and steel manufacturers, which pay the insurance costs of workers who retire as early as 55.