CFCE Blog

Health Care Subsidy Doesn't Add Up


By Loren Kaye
Posted 7/27/2007

The Democrats' health care legislation, AB 8, is premised on a simple notion:  employers must either spend the equivalent of at least 7.5% of their social security wages on health care or pay the difference to the state to finance subsidies for their uninsured employees.  A state agency would then set up an insurance pool for all the uninsured workers, and using the proceeds of the employer tax and some premiums from moderate-income workers, buy health insurance for this population and their dependents.

The concept is simple, but it simply doesn't add up.

According to a recently-released study by the UCLA Center for Health Policy Research, three-quarters of the uninsured are in households that could qualify for a state healthcare subsidy under the Democrats' plan.  That is, they are in household at or below 300% of the federal poverty level. In addition, more than 80 percent of the uninsured individuals are in households with a full time worker. 

Therefore, as the mostly small business employers choose to "pay" instead of "play" - in effect, sending their uninsured employees to the state-run healthcare pool - the overwhelming majority of the workers and their families would require an additional subsidy - even after including the employer tax and employee contribution.

The math works like this:

  • The cost of the median small group single premium is $350 and family premium is $846, according to the California Healthcare Foundation.
  • Assume state purchasing power can drive these premium costs down to the 25th percentile, which for single and family premiums would be $278 and $675, respectively.
  • Assume the enrollee in the state plan works full time making $12 an hour.
  • The payroll tax forwarded by the employer for this worker would be $156 a month.
  • Assume the enrollee pays three percent of monthly income as the share of the premium - that would be about $62.
  • Total premium contribution by the employer and employee/enrollee would be about $218.  This falls short of the requirements for a premium for a single policy by $60 and a family policy by $457.
  • For a $12-an-hour worker, the true payroll premium for a discounted health care premium would be 13% for a single policy and a whopping 32% for a family policy.

These shortfalls are present at virtually every income level up to 300 percent of poverty, even with a substantial worker premium contribution.

There will simply not be enough high-wage workers in the state pool to provide adequate subsidies for the low-wage workers with a 7.5% payroll tax, or even a 10 percent payroll tax.

This entitlement program would be underfunded and unsustainable.  The locomotive they intend to build will become an inevitable train wreck.



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