An analysis of the so-called “Wal-Mart” bills that would require employers with some given number of employees (in Maryland it’s 10,000 in-state workers) to spend a certain % of payroll (X%) on health benefits or pay a tax to the state equal to the difference between what they do pay for health coverage (Y%) and X%. Employers spending at least X% of payroll for health benefits don’t pay the tax. I’ll call the bill the Payroll Bill.

(An aside: The role of employers in the US health system has been of great interest to me.
I began my health research focused exclusively on employer-sponsored health plans, & was working in grad school toward writing a dissertation about employee benefits, all to say my comments are the result of a decade worth of thinking about and studying these types of issues.)

Background on Employment and Health Insurance

The connection between employment and health insurance in the US arose during WW2. FDR imposed a wage-and-price freeze, so employers couldn’t change wages to try and attract new workers. A movement arose by employers to begin offering health coverage as a “fringe benefit” to attract and retain workers; FDR’s freeze allowed this. The practice continued after the War, and there were a few key court decisions and laws that helped expand it and make it a major institution in the US. Health benefit coverage grew, to a level in the mid-60s at about 67% of all Americans being covered under an employer plan. It held at the level until just the last few years where it’s dropped to about 60% currently.

I think the Wal-Mart health bills are significantly misguided and counter-productive to achieving a truly just and cost efficient health system in the US, i.e. universal/single-payer (USP). Employer health plans are one of the worst elements in the US health system. Without their extremely widespread existence from long ago we'd have almost certainly developed a publicly-financed system long ago--like all our peers have. Herein I present my analysis and argument.

What’s Wrong with Employer Health Benefits?

1. Any employee benefit gives an employer a role in a part of a worker's life that has nothing to do with the work-relationship. Whatever degree of influence/control/decision-making/shaping/surveillance is present in a benefit, any employer involvement in the employee’s life at all alters the employer from being just an "employer." For instance, when an employee is participating in their employer’s health plan the employee becomes a “customer” of the health plan offered by the employer serving as a “vendor” of health insurance. Thus the relationship takes on an additional dimension from the commonly understood employee—employer relationship to one of employee/consumer—employer/producer. And additional dimensions are added to the relationship through additional benefit offerings and other non-production related matters. I want to go to work 8-5, go home and have my employer out of the other spheres of my life; otherwise they play a role in affecting those spheres.
2. With health care this is particularly insidious because of the magnitude of the issue--health/life and death--and privacy. Employers have access to a great deal of worker's medical records, and this access is complete for a self-insured employer.
3. Health benefits empower employers to have a role in health care policy-making both at the level of workers and society at large that has nothing to do with what the employer exists for, like making computers or cars. Why should IBM, Microsoft, Wal-Mart, McDonalds and other employers serve as health care policymakers, as they do in selecting what health plans to offer and what coverage to offer in those plans. The employer role as health policymaker is particularly strong when an employer self-insures, since they are completely free from state regulation in creating their health plan policies and coverage terms due to ERISA and an absence of federal regulation of these plans. Wal-Mart self-insures.
4. Employee benefits are a type of compensation where the employee has little (or no) discretion over how the cash-value is spent. If you don't enroll in a given benefit product (like a health care plan), you're not given the cash value in cash in lieu of forgoing the benefit. Thus your employer has decided how to spend that money for you, if you’ll take it, but won’t otherwise give you some other compensation, like, say cash. Letting employers use benefits gives them a degree of power over whatever issue the benefit relates to, like health care.
5. Health benefits have created the health-insurance class system we have: Unemployed or employed? Full-time or part-time? The “right” industry? The “right” level of authority? The “right” employer? A large employer? A small employer? Self-employed? Contract worker? All of those factors influence whether a given person has health insurance or not. Job-lock-type issues are a problem. All of these variables structure who has health insurance or not, and how beneficial it is. Are you more “worthy” of receiving health coverage because you work fulltime for IBM rather than working for a small business that can’t afford to provide health benefits for employees?

Employment-based health insurance is the cause of numerous problems in our system, not the least of which is lack of universal coverage. Most of all, many others and I think we would have a publicly financed universal system had we never developed the tie between work and health coverage. Employer-based health coverage has stood, and still stands, in the way of a just, cheaper, universal system.

The Economic Perspective.
The Payroll Bill idea has many flaws in theory, and in practice such as the Maryland version that passed both house of its legislature in Spring 2005, vetoed by their

Governor that spring, but became law in January 2006 when the legislature over-rode the Governor’s veto.

If Wal-Mart is required to pay a higher % of its payroll for health coverage, where does that additional money come from? You need to think of Wal-Mart as having its own internal “Wal-Mart” economy. Relevant elements in Wal-Mart’s economy are: Profits, cash compensation (aka wages and salaries), health benefits, other benefit compensation, product prices charged to customers, and paid to suppliers. If the health benefit costs increases, the extra money could come from lower profits, lower cash compensation (directly lowered or just not raised as much in the future), lower other benefit compensation, higher product prices, layoffs of those without-or-without health coverage, or combinations thereof.

What good is it to raise health benefit spending at the expense of lower wages, or reduced other benefits, or layoffs? You can’t specify in practical terms that the extra health $ will come out of profits. It’s impossible in financial terms to require this, or to identify that as being the case if you tried to write that into law. The Maryland Wal-Mart bill and bill language drafted elsewhere that I’ve seen are naive, myopic, and flawed. Why? Maryland reads, for for-profit employers, ‘Pay 8% of payroll toward health benefits or taxes so that health benefit spending and tax paid equal 8% of payroll. For non-profits, the rate is 6%.’

Here’s some ways (of perhaps more) for Wal-Mart to comply without covering any more workers (i.e. none would come off Medicaid, etc.):

1. Increasing the monetary value given to the health benefit of those people already covered under their health plans, i.e. no additional workers would get health coverage, just those (or some of those) covered already get more of their health costs covered by Wal-Mart, like executives.

2. Reducing payroll in total while keeping the health benefit cash amount spent the same. There are numerous ways to do this: elimination of jobs, particularly counter-productive for the low-wage Medicaid-eligible workers without Wal-Mart insurance already since they’d become unemployed, lower wages, reduced values of other benefits, etc.

3. Trying to reduce it’s employee figures by, if possible, creating separate legal entities for its operations in Maryland with each employer having fewer workers than the threshold 10,000 mark, or otherwise deliberately cutting jobs to be under the threshold employee figure of 10,000. One possible way to do this would be to alter the ownership of some stores by creating franchises, enough of them until the total number of employees of Wal-Mart itself number fewer than 10,000.

4. One commentator has suggested that an employer, like Wal-Mart, could avoid paying either the 8% of payroll on health benefits, or a tax equal to that amount but not complying with either option. Why? The claim, not fully verified by me, is that the Bill calls for a fine of $250,000 for each year of non-compliance (true), and that Wal-Mart could opt to pay the $250,000 fine rather spending the millions it would need to by complying with either of the options. It’s far-fetched that this would happen; it would be a public relations disaster for Wal-Mart and would no doubt spur amendments to the law.

The economic analysis given to the issue by the movement supporting these bills is myopic, as the Maryland Bill language demonstrates. People seem to assume that the money Wal-Mart would need to pay would come out of profits. There is no basis for this assumption, but I think we can assume, given Wal-Mart’s history and the expected behavior of any for-profit corporation, that Wal-Mart would do everything it can to make sure the money comes from somewhere else rather than cutting profits.

The Legislative Perspective

It will likely take many years for a bill like this to become passed into law. In MN it almost certainly couldn’t become law until there is a DFL Governor and there's also a strong DFL hold on the legislature. That can’t happen until after the 2006 elections—2007 at the earliest. But the process to enact the Bill wouldn’t happen overnight in 2007, even under a DFL-controlled House, Senate, and Governor. So it’s almost certainly 3 years before passage in the legislature and the Governor’s signing into law. And that’s under extremely optimistic conditions. Even if there were a strong DFL hold at the Capitol that doesn’t mean the Payroll Bill would make it through. Maryland was working since 2002 to get its Payroll Bill passed. It could, and likely would, take more than 2 years, if it were ever passed.

The day after a Governor signs it (from here on let’s just think of MN, ignoring actions in other states about the same issue to simplify things), Wal-Mart, with the support of many other large corporations, files multiple lawsuits at the state and federal levels. While some of these suits might stop the Bill, some just tie things up in the courts. The one lawsuit that matters most is the ERISA claim Wal-Mart will file in federal court. Although, depending on court rulings regarding the legality of Maryland’s law, the courts may have established definitive rulings before a Minnesota law is passed. But this is uncertain.

The Legal Perspective

ERISA=Employee Retirement Income Security Act (1974), a federal statute. ERISA was passed in reaction to major pension failures in the US in the early 70’s: fraud, bankruptcy, embezzlement, etc. “Retirement Income” reveals the target. ERISA was seen as needed to put these plans under federal regulation, rather than 50 individual states. ERISA was written so broadly that it serves as the statute regulating most employee benefits in most ways, including health coverage, and puts them under federal jurisdiction; states can’t regulate these benefits in almost any way. The main ERISA clause is as vague and broad as possible: ERISA shall "supersede any and all State laws" so far as "[the State laws] relate to any employee benefit plan."

Many people are familiar with ERISA in relation to self-insurance (or “self-funded”) of employer health plans. ERISA has a clause relating specifically to self-insurance, and many people have become aware of this issue in the past ten years, including most legislators in the country from the state level on up. But ERISA’s reach is not limited to self-insurance. It relates to all employer health benefits and prevents states from regulating them in most ways. Because of ERISA, states can’t mandate that employers provide health benefits, nor regulate them. There is one complex, and unique exception in the case of Hawaii.

The issue with the Payroll Bill is whether it is a de facto state employer mandate. Although the Payroll Bill offers Wal-Mart the choice of paying a tax or paying X% of payroll for health benefits, that isn’t a true, “free” choice, in my view. If the courts allow the Payroll Bill, it would seem to me that states could possibly require employers to cover “x, y, z....” in their health plans, if they have one, or else pay some amount in a tax to the state, based on the same principle. That sounds very much like regulating employer health plans to me, which ERISA prevents states from doing. (There are all sorts of requirements of what an insurance plan must cover—mandated coverage—and taxes and assessments, but all of these apply to insurance companies, not the employer plan itself). Legal opinions on the ERISA issues as they relate to the Wal-Mart Bill vary widely.

The Wal-Mart Bill could possibly be on hold until a definitive ERISA ruling comes down, if Wal-Mart pursues the ERISA preemption issue in the courts. The magnitude of the ERISA claim in the Payroll Bill is tremendous and novel; big, novel ERISA cases almost always end up in the Supreme Court because of how much is at stake: federalism and the question of public vs. private control over the health system, 15% of GDP.

ERISA addresses the division of powers between the federal government and the states in a very significant way, so the stakes are very high. Add to that the significance of health care, the wealth and power of Wal-Mart (and other corporate supporters) and the state(s) and the court battle(s) will be enormous, complex, and might even take years moving through the courts to the Supreme Court. I personally don’t see how the Sup. Ct. ruling could support the Payroll Tax, but whatever the ruling, possibly a number of years would pass in the process.

Implications of Payroll Bill If Upheld in Court Ruling(s)

If the Payroll Bill passes and upheld in the courts, what is the result:

1. Employer health coverage/class system is reinforced, and employer-based health coverage will extend to some more people—not many as currently envisioned under the Bill.
2. Who else is helped beyond the relatively few workers? No one, other than minimal tax savings for the general public (but: there could be other increased costs for the public depending on how employers raise the money to pay the higher health costs: More unemployed—hence higher unemployment paid, more Medicaid recipients (for example), higher product prices etc. Self-employed, small business, and other uninsured persons receive no help from this Bill.
3. The health system itself isn't reformed. There’s no cost control that results, no universal coverage produced.

The Real Story

1. Many years, hours, dollars, much human labor is spent by the grassroots movement for progressive health reform on the Bill that could have been spent on working for real reform, such as single-payer or something else that produces a much greater benefit to society. Every minute spent working on something like the Payroll Bill is a minute that could have been spent, but wasn’t, on working for other reform efforts, such as single-payer. In this way, the Bill is counter-productive to single-payer or other broader reform movements.
2. People who are not currently supporters of progressive reform efforts might be attracted to working for the Bill that otherwise could have eventually recruited for single-payer (or other major reform). People who want health reform might see the Bill as the way to go; even if one views the outcome of the Bill in terms of health coverage as positive, it’s a tiny band-aid at best, not a cure, and not a corrective for a major symptom of an unhealthy health system.
3. Legislative time, effort, etc. will also be used up. Many sincere legislators seeking reform will actively support the Bill thinking it’s a real help. All of that time could be better spent, and I think legislative attention re: hearings, debate, etc. will come at the expense of broader reform initiatives. The single-payer bills in MN didn’t receive a hearing this 2005, after passing a MN Senate Committee in 2004 for the first time ever. MnCare cuts ate up legislative attention on health issues this year. If you’ve followed the Payroll Bill movement throughout the country, and in MN, it appears that these Bills—in MN, too—are very, very likely headed for legislative hearings. Will single-payer get a hearing? For those opposed to single-payer or other real reform, like getting HMOs out of public programs, the Payroll Bill gives them a chance to appear to support health reform by supporting or claiming to be considering supporting that Bill, recognizing that they can waste time otherwise spent on real reform.

The group supporting the Maryland Bill is a group that advocates universal coverage through private sector coverage, i.e. continuation of private health insurance via things like employer coverage. They are the enemy of the current reform efforts to dismantle employer-based coverage, and to take health coverage out of the private sector and recognize it as a human right. Many of the large unions are the main supporters of the Wal-Mart Bill approach in Maryland.

I think a lot of the support for the Bill among progressives is an instinctual reaction based on the bash-Wal-Mart mentality. The support for the Bill isn’t a well-thought-through stance, from all indications that I’ve seen. None of the groups that have taken positions on it have offered—from what I’ve seen—an in-depth analysis of the issue beyond the idea of wanting Wal-Mart to cover health benefits for more workers and the appalling notion that Wal-Mart directs workers to apply for welfare and Medicaid. Making Wal-Mart give more workers health coverage doesn’t solve the real problem of wages that are so low that many workers are below the poverty line. Health benefits won’t take these workers off welfare, just Medicaid, although that is not even necessarily true. Since the Bill won’t increase the wages and salaries of workers, anyone qualifying for Medicaid will still qualify for Medicaid, and might stay on it if it’s cheaper for them and/or provides better coverage. And the Bill won’t raise wages—possibly even lowering them in relative terms, and possibly resulting in some layoffs.

The Downside of Moving People off Medicaid, as Perverse as that Sounds.

1. Medicaid provides better coverage than Wal-Mart in some states. Wal-Mart’s cheapness doesn’t end with low-wages and reducing the # of workers eligible for health benefits. Considering not just MN but nationwide also, the cost of providing health coverage through Medicaid via a publicly-administered mechanism is cheaper than through private insurance because the overhead costs of Medicaid are so much lower than the overhead costs of HMOs. Putting people into employer plans will cost the health system more in the aggregate than having them on Medicaid because of the higher level of costs in privately provided health insurance. And we all pay for those health costs one way or another.
2. The cost that I’ve seen given for California about how much extra they pay in Medicaid costs due to Wal-Mart not covering workers is $32 million a year; not even $1 a year per Californian. Is that savings worth the effort of putting something like USP further back in the line of options considered for reforming health care? And also switching some workers from Medicaid into lesser-beneficial Wal-Mart coverage?

Summary

Employer-based coverage is a problem, and expanding the extensiveness of it is a step backwards in itself. If the big picture idea among some people is to reduce the influence and power of companies like Wal-Mart, you make the problem worse by giving Wal-Mart more influence over health care policy and delivery. It’s completely at odds with the bigger notion embraced by progressive activists.

Expanding private sector coverage is a step backwards; single-payer is a move to public financing of health care. In the long and short run we know that private sector, market-based coverage is the problem, not the solution. This can be demonstrated deductively, such as by Nobel-prize winning economist Kenneth Arrow in his seminal paper published in American Economic Review in 1963, which essentially founded the field of health economics. Or it can be analyzed inductively by examining the health care data over time.

Why work for something that will make the problem worse? Why use up so much labor, time, and resources on making the problem worse rather than using those things for more extensive reform options? It’s a zero-sum game, and it will take years to get the Payroll Bill enacted in Minnesota; the rosiest, but unlikely, scenario I envision is 4 years: three years in the legislature, a year in the courts. I think it would take even longer.

I think the outcome of the Payroll Bill is negative and counter-productive, but even if you don’t, and you’re a progressive reform supporter, you need to recognize that all the time and money spent on it comes at the expense of true long-term progressive reforms. It will push single-payer or other progressive reforms that will provide a better contribution to the public, further down the road to implementation.

On a superficial level the Wal-Mart Bills might sound good, but it is disastrous for real reform efforts when one really analyzes it deeply. It reinforces and strengthens the hold employers have over health care policy in the state and nation. And it diverts resources and attention from true reform, such as universal/single-payer or other progressive reform measures. The support for the Wal-Mart bills is myopic and counterproductive in the long run.

Employers do not have an obligation to provide health benefits for their employees. There is no law at either the federal or state level declaring it so. The only basis for the claim of an employer responsibility is based on current and past practice. It’s a norm that got established, and many Americans have come to view employer health plans as requirement of employers. It’s a socially constructed belief, that’s all, and it serves as an impediment to truly significant health reform. The Maryland example is just evidence of how firmly entrenched that belief is, as much as it stands in the way of significant reform.

Copyright 2006. John M. Schwarz, United Health System.