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The Baucus Bill: The Worst Policy in the Bill, and Possibly in the World


Baucus's bill retains the noxious "free rider" provision on employers. Rather than a simple employer mandate that forces every employer over a certain size to provide health-care insurance or pay a small fee, the free rider approach penalizes employers for hiring low-income workers who are eligible for subsidies. That will create an incentive to do one of two things: Don't hire low-income workers (hire a teenager looking for a job rather than a single mother, or hire a housewife looking for a second job rather than an unemployed breadwinner), or hire illegal immigrants.

And it actually gets worse. The employer pays more if the low-income worker needs subsidies for his family as opposed to just himself. So it not only discriminates against low-income workers, but it particularly discriminates against low-income parents. Single mothers will get the worst deal, as they have lower incomes, and as you might expect, children who need health care.

The penalty itself is a bit confusing, and if anything, even worse than one might imagine: The employer will pay the lesser of A) the average subsidy in the exchange times the number of subsidized workers or B) $400 times the total number of workers. Two examples should clarify this:

Baucus Corp has 100 employees and does not offer health-care coverage. Thirty of the employees receive subsidies on the exchange. The average subsidy that year is $5,000. Baucus Corp woulds pay $400 times 100 employees, as $40,000 is less than $150,000 ($5,000 times 30 employees). Each of those low-income employees is costing Baucus Corp $1,333 more than an employee who didn't need subsidies.

Now imagine that Baucus Corp. only has five employees who need subsidies, and the average subsidy that year is $5,000. In that scenario, Baucus Corp would pay $25,000 rather than $40,000, because $25,000 is less than $40,000. Each low-income worker now costs Baucus Corp. $5,000 more than a worker who doesn't need subsidies.

So in the scenario where Baucus Corp. has a lot of low-income workers, they cost a huge amount overall because they're multiplied against the total number of workers. In the scenario where Baucus Corp. has a few low-income workers, they cost a huge amount individually because they're multiplied against the average subsidy cost. No matter how you look at it, the policy makes it profitable for employers to discriminate against hiring low-income workers. It is not only the worst policy idea in the bill, but one of the worst policy ideas I've ever seen.

Update: Originally, this post didn't include one of the penalty options, as I was basically confused on how it worked and thought it would apply too rarely to be worth mentioning. I reread the section, though, and corrected the post to offer a fuller picture of this no good, very bad, horrible policy.

Photo credit: AP Photo/Harry Hamburg.

By Ezra Klein  |  September 16, 2009; 2:39 PM ET
Categories:  Health Reform  
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Next: The Baucus Bill: The Neutered Co-Ops


Wait, that's not quite right. The employer pays $400 x (total employees) only if the assessment would otherwise exceed that sum.

The 'usual' assessment is (average subsidy amount) x (# of low-income employees).

Of course, should average subsidies settle at levels way above the $400 pseudo-cap, then the 'replacement' formula will usually dominate.

In either case, I agree that it's an absurd tax on hiring low-income employees.

Posted by: BenDaniels | September 16, 2009 3:35 PM | Report abuse

And isn't this more an incentive for employers of low-income workers to provide health insurance to all workers? This is propping up the employer-based system that we have now - and combined with the neutered co-op in the next blog item, it means a permanent ghettoization of low-income workers and the businesses that employ them.

Posted by: boloboffin1 | September 16, 2009 3:44 PM | Report abuse

That isn't quite right. The impact on any given firm will depend on their mix of workers from high and low wage families.

If a firm has a small number of low-income workers and a large number of high-income workers, they would be required to re-pay the entire cost of the subsidy for those workers, which would create a deterrent to hiring workers in low-income families.

If the firm is made up entirely of workers from low-income families they would pay just $400 a year per worker, much less than the subsidy those workers receive in the exchange. In this case the firm benefits considerably from the subsidies their workers receive in the exchange.

The incentive is to build a workforce that either entirely excludes, or is mostly made up of low-income workers. The problem comes when they are mixed.

Posted by: kjacobs9 | September 16, 2009 3:52 PM | Report abuse

You totally fail to see the genius of Baucus' plan. See, if there is a huge disincentive to hire low-income workers, what will bosses do? First, they will avoid low income workers like the plague, so those workers will be unemployed, and therefore very likely eligible for the expanded Medicaid program. Second, if they are forced by tight labor market conditions to hire otherwise low-income people, they will make certain to pay them so much money that they no longer qualify for health care subsidies. The result: either substantial coverage via a public plan, or sharply reduced income inequality. Or a little of both. Max is closet Marxist!!

Posted by: rwclayton7 | September 16, 2009 3:54 PM | Report abuse

No one should freak out about this. It will NOT last. It may not even survive the vote out of committee. Lots of noise being made about it.

Posted by: LindaB1 | September 16, 2009 4:04 PM | Report abuse

That's a good point Linda, I'm wondering if its worth my time to read this anymore.

If this part stays, ugh. It's like they're leaving out one of the best features of the Massachusetts model.

Posted by: ThomasEN | September 16, 2009 4:08 PM | Report abuse

How would this even work for people/families with two (or more) jobs and/or side income? Would it be self-reported or would the employee somehow have access to IRS info? If it is self-reported, what advantage would I have to tell my employer I need a subsidy? What would I get out of it? If it is not self-reported, that brings up a lot of privacy issues.

Posted by: missionpeak | September 16, 2009 5:13 PM | Report abuse

rwclayton isw right. has anyone asked the CBO to score the Medicaid and welfare for children impacts? What a hartless scum Baucus is.

Posted by: Mimikatz | September 16, 2009 5:16 PM | Report abuse

Word - and it only raises $27 billion, compared to $52 billion from the HELP Play or Pay.

Posted by: polenta | September 16, 2009 5:27 PM | Report abuse

Baucus or Bogus?

Posted by: XRayD | September 16, 2009 7:40 PM | Report abuse

Well who determines whether an employee is low income or not? The employer, that's who! Of course, the WalMarts of the world like to dodge their own culpability for paying low wages, but there's no reason for anyone else to accept this terminology.

Posted by: Aatos | September 16, 2009 8:01 PM | Report abuse


You still don't have it right. If an employer has mostly workers from low income families, $400 a year is much less than the cost of health care or the value of the subsidies that their workers will receive by enrolling in the exchange. It is bad for the opposite reason that you give. In this case it does little to prevent crowd out or to level the playing field between employers, which is the point of the employer requirement in the first place. No disagreement that the requirement is bad and that it should be removed--but it should be replaced by a meaningful employer requirement that will actually work.

Posted by: kjacobs9 | September 16, 2009 9:24 PM | Report abuse

I'm not seeing the logic, except the part about hiring illegal aliens.

(oops, i'm sorry UNDOCUMENTED aliens)

How can an employer fail to hire low-income workers? The employer is providing the income.

The only way they can avoid hiring low income workers is to raise wages.

If health care reform accomplished increased wages, that's a good thing in my book.

In my book, the BAD thing is the measly amount employers have to pay to avoid providing health insurance at all. $400 per worker? You've GOT to be kidding.

On the other hand, that means there will be lots and lots of workers in the "co-ops" or "exchanges" and it's the number of people in a buying group that determines its ability to negotiate with the illness insurance companies.

Posted by: theRealCalGal | September 16, 2009 11:54 PM | Report abuse

Correct me if I am wrong, but, one big point of the "fee" is that it will often be cheaper to pay the fee than provide insurance to the companies employees. So, companies pay the fee, dump insurance, and the employees have to go through the exchange, which leads eventually to single payer, which is the whole point of most of the Democrat plans.

Posted by: NCDevil | September 17, 2009 8:38 AM | Report abuse

The policy you describe as wrong is the whole point if your goal is single payer coverage. Get as many people out of the employer system as possible to make it politcally possible to enact single payer.

Posted by: NoVAHockey | September 17, 2009 11:46 AM | Report abuse

Mickey Kaus says you are not stating this correctly.

Posted by: aloysius1 | September 18, 2009 9:30 AM | Report abuse

In the two cases Klein considers, the maximum payment by the hiring company would be $150,000 for the 100 employees. If, however, these 100 employees earned an average of $30,000 per year, then an 8% assessment for non-insurance such as is proposed by at least one House bill would have the company pay $240,000. This would either generate more money to support healthcare or be more of an incentive for the company to provide insurance.

Pure percentage penalty for non-insuranceas in the House bill is better than Baucus' cutesy formula.

Sen. Jay Rockefeller has a bunch of amendments which are very good, including one (#5) that creates a nationwide insurance pool for uncovered workers. This would give them far greater negotiating leverage than having scores (maybe hundreds) of small and statistically dubious co-ops. For details and links to the amendments, see

Posted by: bridger1 | September 21, 2009 5:07 PM | Report abuse

Actually, Mickey Kaus has it right.

According to Ezra, each of the low-income employees in Example 1 is costing Baucus Corp $1,333 more than an employee who didn't need subsidies.

"Equilibrium" - How does a subsidied employee cost more when a constant ($400) is used to calculate the penalty? Irrespective of the mix, 100 X $400 is $40000. It is not until the ratio of subsidied employees to total employees is less than the ratio of $400 (or whatever the Calc B constant is) to $5000 (or whatever the average exchange subsidy is) that Calculation A will be used. It is at this point that having fewer subsidied employees could become more beneficial to Baucus Corp. (Of course, it's extremely silly to discuss this without consideration of employee income.)

With that said, Baucus Corp could have a mix of 8 subsidied employees to 92 non-subsidied employees and still pay $40000. Does this mean that it is now costing Baucus Corp $5,000 MORE than an employee who didn't need subsidies? Absolutely not! The penalty cost to Baucus Corp remains the same with regards to the penalty: $400 per employee.

Additionaly, if Baucus Corp has a mix of 1 subsidied employee to 99 non-subsidied employees, he doesn't care if his per subsidied employee cost is $5000, his per employee cost just went down to $50!

At this point, the absurdity of isolating penalty costs independent of income and other factors becomes apparent. Given an income rate of $25,000 as the threshhold between subsidied and non-subsidied (only for simplistic calculation purposes), consider the following three examples:

Example 1: Baucus Corp has 30 employees who make $20,000 and 70 employees who make $30,000. His total payroll is $2.7M annually. His penalty (Calc B) is $40,000. His simple cost is $2.74M.

Example 2: Baucus Corp has 5 employees who make $20,000 and 70 employees who make $30,000. His total payroll is $2.95M annually. His penalty (Calc A) is $25,000. His simple cost is $2.975M.

Example 3: Baucus Corp has 70 employees who make $20,000 and 30 employees who make $30,000. His total payroll is $2.3 annually. His penalty (Calc B) is $40,000. His simple cost is $2.34M.

The point here is that the penalty will have little influence on hiring or firing an employee that receives a subsidy at the exchange. In addition, the penalty will have little to no influence on income rates. Of the three examples above, Baucus Corp is better off having more employees eligible for the exchange subsidy. Why? Because the of the massive payroll savings. Whether or not this is a good business decision would be up to Baucus Corp.

Let's be honest. These plans aren't designed for anything more than an attractive means by which an employee can shift employees to the exchange rather than providing insurance for employees. This also means that the more subsidied employees company hires, the larger the premium deficit will be in the exchange.

Posted by: JudoCon | September 22, 2009 10:51 AM | Report abuse

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