Health Care Reform: The Baucus "Free Rider" Problem

Editor's Note: Economist Mark Thoma is guest-blogging for The Macro View this week.
There is one provision in the Baucus health care proposal that I believe needs to be changed. It's known as the "free rider" provision.

Under the Baucus plan, if a worker cannot get health insurance from their employer, the government will provide a subsidy to help the worker purchase insurance (which they are mandated to do). The subsidy varies with the worker's income level and other variables such as the number of children.

Employers who do not provide health insurance to their employees must pay a fee to compensate the government for the subsidy it gives to the firm's workers, and to level the playing field between firms who do and do not offer coverage. The problem is that the fee the firm pays is linked to the size of the government subsidy the worker receives, and as just noted the subsidy depends upon the worker's income level and other factors such as enrolling children in the plan.

The effect is that a firm not offering health insurance would pay a higher fee when it employs a low income individual or an individual with children. A low income single parent, for example, would cost the firm much more to hire than the spouse of a high income individual or a teenager from a high income household, meaning they'd be much less likely to hire that single parent.

The solution to this is to break the link between the amount the firm pays and the income or number of children of the people it employs. One way to do this is to impose a fixed fee per worker that in aggregate raises the same amount of revenue for the government as the proposed plan would. But however this problem is fixed, and it does need fixing, the key is to alter the plan so that the firm is not penalized when it employs a low income worker or a worker with children.