NCPA - National Center for Policy Analysis


October 19, 2004

A new law in California, set to take effect in January 2006, will require employers to either offer health care coverage to workers or pay into a state fund for a public program to cover their workers; in either case, the employer will pay 80 percent of the premium.

In a new study, health expert Anna Sinaiko of Harvard University finds that it is most likely that the cost of newly provided health insurance will be passed on to consumers, some felt by workers as unwelcome wage reductions, and some avoided by firms as they restructure their workforces:

  • On average, the workers newly covered by the law will experience a reduction in wages of about 54 cents to $2.09 per hour -- or roughly 5 to 19 percent of their wages.
  • For many companies, particularly retail stores and restaurants that face only local competition, price increases will be a potential alternative; for firms that face national competition, price increases may not be possible.
  • Firms will have a greater incentive to fire, outsource and not hire workers as a result of the higher costs; full-time employees working overtime will be preferred over part-time labor.

Also, companies will have reason not to cover employees who have higher health risks, preferring instead to pay an average premium rate into the state fund. Thus if the state does not adjust the fee for the public pool based on demographic and health risks, the public pool could end up with more costly enrollees, says Sinaiko.

Source: Anna D. Sinaiko, "Employers' Responses to a Play-Or-Pay Mandate: An Analysis of California's Health Insurance Act of 2003,", October 2004.

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