There have been many blog posts about a possible flaw in “Obamacare”. Firms with more than 50 employees incur a fine of $2000/worker if they do not offer their workers healthcare. Their costs of healthcare may be much higher than the penalty and so a preliminary analysis may suggest that they save money by dropping healthcare coverage. John Cassidy does the calculation:
Take a medium-sized firm that employs a hundred people earning $40,000 each—a private security firm based in Atlanta, say—and currently offers them health-care insurance worth $10,000 a year, of which the employees pay $2,500. This employer’s annual health-care costs are $750,000 (a hundred times $7,500). In the reformed system, the firm’s workers, if they didn’t have insurance, would be eligible for generous subsidies to buy private insurance. For example, a married forty-year-old security guard whose wife stayed home to raise two kids could enroll in a non-group plan for less than $1,400 a year, according to the Kaiser Health Reform Subsidy Calculator. (The subsidy from the government would be $8,058.)
In a situation like this, the firm has a strong financial incentive to junk its group coverage and dump its workers onto the taxpayer-subsidized plan. Under the new law, firms with more than fifty workers that don’t offer coverage would have to pay an annual fine of $2,000 for every worker they employ, excepting the first thirty. In this case, the security firm would incur a fine of $140,000 (seventy times two), but it would save $610,000 a year on health-care costs. If you owned this firm, what would you do? Unless you are unusually public spirited, you would take advantage of the free money that the government is giving out. Since your employees would see their own health-care contributions fall by more than $1,100 a year, or almost half, they would be unlikely to complain. And even if they did, you would be saving so much money you afford to buy their agreement with a pay raise of, say, $2,000 a year, and still come out well ahead.
Actually, it is not clear the calculation is correct because there are tax breaks to employers who offer healthcare so the savings may not be as large as Cassidy calculates. A second response is simple: why not just increase the penalties? Cassidy has a ready counter-argument for this suggestion:
Even if the government tried to impose additional sanctions on such firms, I doubt it would work. The dollar sums involved are so large that firms would try to game the system, by, for example, shutting down, reincorporating under a different name, and hiring back their employees without coverage. They might not even need to go to such lengths. Firms that pay modest wages have high rates of turnover. By simply refusing to offer coverage to new employees, they could pretty quickly convert most of their employees into non-covered workers.
I was confused by this point. Does the legislation distinguish between new employees and old employees? If not, I don’t see how this gaming works. If there is a gaming issue, then the legislation will have to be altered to cover all employees, not just present employees.
But finally, competition between firms is a factor that can prevent unraveling. If a firm wants to retain its workers it will have to make up for any shortfall in the quality or price of healthcare in the exchanges by paying its workers more. Otherwise, workers will go elsewhere. The more skilled the labor-force, the more important it is to retain them. In fact, given the absence of enforced provision of healthcare right now, the reason workers are being given healthcare benefits in the first place is because they have the option of working somewhere else. We always emphasize how competition helps consumers but it also helps workers!
Healthcare reform may fail but it’s more likely to do so for some other reason (cost control, impossibility of rationing?) than penalties which can so easily be adjusted.
of the time and a full dose the remaining 
fraction of the time. And let 
be the patient’s belief in the probability the prescription will work. Then the placebo effect means that the true probability that the prescription will work is determined by a function h which takes two arguments: the true dosage (=1 for full dose, 0 for placebo) and the belief 
. And in equilibrium beliefs are correct:
be the dosage (somewhere between 0 and 1), we get
now as a function of the fixed dose 
is continuous and monotone, then the range of 
and 
is larger than 
. That boils down to a cost-benefit calculation. But I doubt that this kind of calculation is going to be pivotal in a debate about using placebos as medicine.
Cheap Talk 
