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Busboys On The Street

Jan
18
2006

Everybody’s a critic but some critics – particularly those with real-world experience – shouldn’t be ignored. My last pair of columns discussing the uninsured and San Francisco Supervisor Tom Ammiano’s proposal to get city employers to cover their employees health care costs caused a moderate amount of fuss. One San Francisco restaurateur told me in a series of emails that the new law would put essentially him out of business. I think he’s actually wrong, but he does point out why, politically, pay-or-play is so tough, and also why it’s bad public policy. So let’s talk about the Incanto problem, and then we’ll hint at some solutions.

What’s the Incanto problem? Incanto is a fine restaurant in San Francisco’s Noe valley neighborhood. By San Francisco standards it’s not particularly expensive, but it’s not cheap eats. Furthermore, restaurants like this are one of the main reasons why San Francisco is such a great place to live, and we don’t all sell up and move to (insert name of podunk town here) instead. Incanto’s owner Mark Pastore took issue with my remark that pay-or-play wouldn’t be that disastrous because many of the businesses that would be forced to pay for their employees health insurance couldn’t move, and would stick their prices up instead. Here’s Mark’s experience:

There are limits (in economics the concept is known as price elasticity) to increasing revenues by raising prices. In my own restaurant, which is considered one of the better restaurants in the Bay Area, our prices increased slightly in 2005 (3-4%), however our total revenues declined slightly versus the prior year.

In other words the consumer wouldn’t deal with the price increase, costs went up and profits went down. Now the marginal dollar that was no longer being spent at Incanto got spent somewhere, presumably not on dining out, or, if so, at a cheaper restaurant. Now, that may not matter to economists or health care consultants too much, it matters like heck to Mark and his fellow owners. So even though I can cite evidence that these forced wage increases on a city or national level don’t impact unemployment overall, they may cause an adjustment in employment. This will necessarily be exacerbated in the San Francisco proposal where employers with fewer than 20 employees won’t have to pay into the insurance fund, and therefore will have a big cost advantage over those that do. So you can expect an enormous amount of opposition to this from people directly affected, who will make their feelings very well known, whereas it’s hard to identify businesses that will gain (even if some do).

The ordinance may avoid his Gavness’ veto — don’t forget that Newsom ran a group of restaurants but is also responsible for the city budget — much of which goes on the spending on the uninsured at SF General hospital. If it does, you can expect that lots of restaurants that were 40 tables and 25 employees suddenly lose 20% of both. Lots of other small businesses will get smaller and split into two, delivering a mini-boom for creative lawyers and accountants.

This leads to the second problem with pay-or-play. Mark is one of the good guys. He is paying already for some limited insurance coverage for his employees, but he sent me some data which suggests why forcing the employer to pay for insurance, or in fact connecting health insurance to employment or even individuals, is not a good idea. A big business like Wells Fargo makes more than $250,000 in revenue per employee and more than $70,000 in profit — so telling them to provide insurance at up to $10,000 per employee a year isn’t too much of an imposition. Incanto makes less than $60,000 in revenue per employee, and less than $2,000 per employee in profit. If forced to provide $345 a month in health insurance under the new ordinance, Mark estimates that a down-turn in dining habits, or unwillingness to pay $2 more for an entree will mean that Incanto starts losing money. And of course this is for a successful restaurant.

So the second problem is that uninsurance is connected to low-wage employment, and by definition some jobs are going to be low wage. The beauty of the campaign against Walmart, which forced it to provide low wage workers in Maryland with health insurance is that WalMart has competitors which do provide health insurance to their employees, and so can be held up as a bad example — and they’re profitable enough to afford it. But other low wage corporations like McDonalds, 7–11 et al in general don’t, and they are of course behind any national attempts to oppose pay-or-play, usually using small businesses as a front.

But eventually – whether or not it’s a big or a small business or a direct individual – mandating the payment of a flat rate for health insurance is essentially a regressive tax, one that harms poorer pople more. Pay-or-play schemes can therefore only be fair if they’re associated with public subsidies for low-wage employees. And if we’re going to hand those out, why not go the whole hog and realize that the cost of health insurance should be progressively distributed — in other words based on a tax in which those that earn more pay more and subsidize those that earn less? It’s not that far a walk.

Now before you Libertarians get all up in arms about that, realize that half the health care system is already paid for by the government (Medicare, Medicaid, the VA, public employees etc, etc,) out of a mix of payroll taxes or general revenue. So it makes more sense to take health insurance out of employment altogether and allocate a mandatory basic package equally. (This being America, of course the rich will trade up to a better class of waiting room, but that mandated basic package can be paid for out of general revenue, or a specific tax, maybe a sales tax, or a combination). Then once we’ve got past the financing mess, we’ll realize that we all need to be on the same side — the side that wants to contain the cost of the beast known as the health care system. Mark got there pretty quickly:

I should further thank you for helping me understand that the biggest problem (perhaps it’s really the same problem) is actually the one you identified in the first article you wrote for Spot-On about this issue: “In the early 1990s the U.S. was spending just over 10% of the GDP on health care, a little under $1 trillion. A little over a decade later we are spending a whole lot more: Around 16% of a much bigger GDP.” I’m not sure, prior to reading your article, if I had ever thought deeply about whether I was for or against government healthcare. I was always of the opinion, “show me the specific plan” and that I would judge it on its merits. But you have convinced me – on a philosophical level – that having government-backed health insurance is the only way to hold or reverse the spiraling costs of healthcare within our economy. And I hope I’m not being disingenuous by saying that as a small businesperson I would not be opposed to doing my share (I’ve been trying to for four years) to contribute to the greater good – if it would actually bring the beast under control.

So we’re now logically on the same page. Government needs to create a regulatory and finance structure that shares the burden some type of progressive taxation, that includes everyone, and that gives everyone an incentive to see lower costs. Unfortunately, very few small businesses or their national associations have figured this out, even now. And their think tanks and political allies are pushing solutions that will make our problems much worse. But more on that next time.

Share  Posted by Matt Holt at 2:27 PM | Permalink

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