Health Program Could Realign Work Force : Reform: Budget office warns that skilled-unskilled gap could widen. Small firms might keep wages low.

The issue has been overshadowed so far by the debate over government spending, but congressional analysts warn that President Clinton’s health care reform plan could contribute to a fundamental restructuring of the U.S. work force.

According to a report by the Congressional Budget Office, the Clinton plan could widen the existing divide between professional and unskilled workers, accelerate the trend toward corporate “outsourcing” of work to independent contractors and create new incentives for small businesses to stay small and keep wages low.

The CBO analysis, while not intended as an attack on the Clinton plan, could provide new ammunition to congressional opponents who hope to stop the White House from rewriting the rules governing a sector that accounts for one-seventh of the nation’s economy.

The nonpartisan budget agency, which prepares financial analyses at the request of Congress, says some of the labor market changes it foresees could work to the advantage of employees. And it notes that the existing system, which leaves 37 million Americans without health insurance and forces others to pay far more than their fair share, is hardly a model of fairness or efficiency.

Still, the budget office’s predictions about potential employment impact could increase the wariness of lawmakers who are already hesitant to endorse what is arguably the largest piece of social legislation in the nation’s history.

“Any plan that is this complicated is going to have all sorts of unintended consequences,” said Rudy Penner, an analyst at KPMG Peat Marwick, a Washington consulting firm. “We could sit for hours and only think of a fraction of them.

“It takes a lot of poring over the details to recognize all of the possible consequences, and I’m sure we missed a lot of them,” said CBO Director Robert D. Reischauer. “If you make a big change like this, you suddenly get all kinds of consequences that you didn’t think of.”

Administration officials acknowledge that they recognized the potential for labor market disruptions long before Reischauer released the CBO analysis, which said the health plan should be regarded as a vast new government entitlement program and estimated that it would cause the federal deficit to balloon in the near term. But the Administration officials said they saw no reason to call attention to the employment impact.

“We were surprised no one picked up on this before CBO,” said one senior Administration policy-maker who requested anonymity. “We didn’t really hide it; we just didn’t stick it in your face for you to see.”

The potential work force changes identified by the CBO are largely attributable to the Administration’s decision to soften the blow of health care reform on small-business proprietors, who are among the most vocal opponents of mandatory universal coverage.

Under the Clinton plan, all employers would be required to provide health insurance for their workers and to pick up most of the cost. Once the plan was fully phased in, no company would be required to spend more than 7.9% of its total payroll for health coverage.

But small firms with many low-wage employees would get a big break: Depending on their size and average wages, the maximum contribution would be reduced to as little as 3.5% of payroll. The government would pick up the difference.

The impact of the subsidies could be dramatic. The CBO estimates that a typical employer whose workers receive an average of $40,000 a year would be required to pay an unsubsidized premium of $2,031 for each single employee on its payroll. But a small firm employing unskilled workers whose wages average $10,000 a year would qualify for the maximum subsidy, lowering its cost per employee to only $350.

Under the Clinton plan, the less an employer paid its workers, the bigger the subsidy it would receive.

The CBO warns that the subsidies could contribute to the stratification of the U.S. work force by creating incentives for low-paid workers to migrate to small employers, and for well-paid, highly educated workers to congregate at bigger companies.

The potential impact on the labor market is enormous, the budget office said. By 1998, an estimated 8 million low-wage workers now working for larger employers would be worth considerably more to small firms that qualify for the health care subsidies.

The CBO predicts that 20%, or 1.6 million, of those workers would actually change jobs. Some would go voluntarily because subsidized firms could afford to pay them more. Some would be forced to make the move as the private sector restructured itself in response to the Clinton plan.

The potential shift would be so large that it could add $12 billion a year to the cost of the government subsidies starting in the year 2004, the CBO analysis said.

“Workers at different wage levels would have an incentive to work for different firms,” it said, noting that the creation of two classes of employers--a phenomenon it calls “labor sorting”--would “reduce the efficiency of the labor market.”

The long-term impact on the U.S. economy is far from certain.

“The reason this is a problem is that corporations might start doing things that don’t make economic sense at all except to take advantage of these federal subsidies,” said John Shiels, a health care expert with Lewin-VHI, a Fairfax, Va., consulting firm that has conducted its own analysis of the Clinton plan.

“Corporations might begin to organize themselves in ways they otherwise wouldn’t, and become less efficient as a result,” Shiels said. “Those inefficiencies should be counted as part of the costs of health reform.”

Corporations are already restructuring in response to health care costs. The difference is that they are now divided between those that provide private insurance and those that don’t. “You have got to remember that the current system has plenty of unintended consequences of its own,” Reischauer said.

The CBO analysis assumes that lower-paid workers would gradually migrate to smaller employers because of the economic value of the subsidies.

For example, in a city where the prevailing wage for janitors is $15,000 a year, a big employer with a sizable number of higher-paid employees would have to pay an additional health care premium of $2,000 or so for each new janitor it hired, the CBO calculates. But a small custodial contractor with fewer than 25 employees and no white-collar workers would pay a premium of only about $500 because of the payroll cap.

All other things being equal, the subsidy would make it possible for the contractor to bid for the big company’s custodial work at less cost than the company was paying to do the work itself.

The value of the subsidy could trickle down to workers if the contractor decided to pay his janitors more than the $15,000 prevailing wage.

Or it might trickle down to consumers if the big company reduced its prices as its operating expenses declined. In either case, taxpayers would be paying the subsidized portion of the health premium.

For higher-paid employees and their bosses, the incentives could work in the opposite direction. For a small, subsidized firm, the presence of one or more highly paid professionals on the payroll would reduce the value of the government subsidy, since it would be based on a percentage of total wages paid. But at bigger firms, where total premiums are not expected to hit the 7.9% payroll ceiling, big salaries would not necessarily increase health care outlays.

“You could end up with a situation where a company like Microsoft, which has lots of highly paid workers, will spin off its janitorial service to take advantage of subsidies, while a company like McDonald’s, which has lots of low-wage workers and only a few high-paid executives, will spin off its professional staff into a separate entity to avoid higher costs,” said one White House official. “We don’t know how much of that will take place.”

Reischauer predicts that small firms might eliminate highly paid jobs by doing such things as contracting out for advertising and legal work, allowing them to shut down in-house departments.

White House officials say labor market distortions are among the first issues they will attempt to address as they try to respond to the CBO analysis of the Clinton plan.

The most likely modification is one the Clinton health care task force considered, but rejected, as it developed its plan last year, according to one Administration official.

The premium subsidies could be channeled to individual workers who qualify, rather than being funneled to corporations to cover their overall payroll costs. That would eliminate the incentive for firms to divide themselves along subsidized and non-subsidized lines.

White House officials said they originally rejected that idea largely for political reasons: It would let rich law firms and investment companies enjoy the benefits of having some of their lower-paid workers receive subsidies.

But fixing one unintended consequence could lead to yet another.

“It is things like this that make me a gradualist when it comes to public policy,” Penner said. “This plan, after all, is the equivalent of creating not one, but several new federal entitlement programs all layered on top of each other. And we are all just making guesses about what this plan would do.”