HARRISBURG -- Republican lawmakers expressed reservations yesterday about imposing a new business payroll tax to help expand state-subsidized health insurance in the first public hearing on Gov. Ed Rendell's plan to make health care cheaper and more efficient.

The administration is calling for a payroll tax on an estimated 100,000-plus employers that do not currently insure their employees. The tax rate would be 3 percent for each of the first three years and would then increase to 3.5 percent in the fourth year.

Drop insurance? Republicans have complained that Rendell's proposal would encourage some employers to drop private insurance coverage if it is cheaper to pay the payroll tax for state-subsidized insurance.

"I'm curious as to why I wouldn't drop coverage" as an employer, said Rep. Scott Boyd, R-Lancaster, a member of the House Insurance Committee.

Rosemarie B. Greco, the director of the Governor's Office of Health Care Reform, said that was unlikely to happen because employees would have to go without health insurance for six months before they could enroll.

In addition, businesses with fewer than 50 workers would be exempt from paying in the first year, she said.

"In a tight labor market ... employers are loath to drop health care coverage because an employer that does have health care coverage will become that much more attractive to the employee," Greco said.

Initiative: The payroll tax would be one of several funding sources for Rendell's "Cover All Pennsylvanians" initiative, which aims to insure about 800,000 adults who lack health care coverage and enable small businesses to cover low-wage workers at a discount.

The proposed insurance expansion is part of a broader "Prescription for Pennsylvania" that is intended to reduce health care costs and improve the quality of care. The plan also would outlaw smoking in workplaces, restaurants and bars across the state.

James R. Buckley of the Delaware Valley Health Care Coalition, a Philadelphia-based association of union employee-benefit funds, told the committee that the cost of the tax would put its employers at a disadvantage when bidding for work.
"The ultimate legislation should reward, not disadvantage, the decent employers who currently provide health insurance benefits to their employees without government assistance," Buckley said.

Funding sources: Other funding sources for the insurance expansion include money from the state's tobacco settlement fund, federal Medicaid dollars and premiums paid by participating employees and employers.

The administration originally contemplated using new tax levies on cigarettes and other tobacco products to pay for the insurance expansion, but later decided that revenue wasn't needed, said Susan Hooper, spokeswoman for Budget Secretary Michael Masch.

Instead, the tobacco tax revenue would pay for other health initiatives such as improving school food services, reducing hospital-acquired infections and flu pandemic preparedness, Hooper said.