About three years ago, a line of people crowded behind Massachusetts Gov. Charlie Baker as he sat down at a big wooden desk and took out a pen.
It was a moment Randy Albelda had been dreaming about and working toward for nearly 20 years. The governor was signing paid and family medical leave into law for almost everyone in Massachusetts.
“It's like the best thing I've ever done in my entire career,” said Albelda, who is an economist at UMass Boston.
“Almost every worker in Massachusetts, now, if they have an accident or if they have a baby, if their parents get sick and they need to take more than five days off to take care of them, they can do it without losing their wages,” Albelda explained.
The law, which is just now being rolled out, is a crowning achievement for progressives, extending a safety net to workers at all income levels.
But more than a million people in Massachusetts work for companies that have opted out of the system, according to public records obtained by GBH News. That’s nearly one in three workers in the Commonwealth who are not in the state’s paid leave system.
Some experts say that hole in the safety net has the potential to undermine the program's financial stability.
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“I don't think that's what anyone anticipated,” said Albelda. “If a lot of employers leave, then you lose all the benefits of what a social insurance system is.”
The state’s Department of Family and Medical Leave refused requests for an interview over the course of two months. But an official said in an email that “at present the amount of employer opt outs has not had an adverse effect on the ability of the trust to meet benefit demand.”
The System And The Catch
The paid family and medical leave law created a classic insurance system. There’s a payroll tax for employers and employees. That tax revenue is then pooled together into a fund that allows the state to write checks to employees who need to take leave to recover from a medical issue or care for a loved one. People receive a percentage of their income while on leave.
It seems simple enough — but there’s a catch.
Companies can choose to leave the state system, opting out of the pool and going with a private insurer. Industry groups pushed for this provision when the bill was being debated.
“We heard from many employers who asked us: If we're providing this benefit already, can we just continue to do ours?” recalled State Rep. Ken Gordon, D - 21st Middlesex, who introduced the initial legislation and was there when the details of the law were hammered out.
By the end of negotiations, the answer was yes. And while many advocates didn’t want the opt-out provision, Albelda said, they also weren’t too worried about it.
“You can only opt out if you provide all the benefits to all your employees, and so that's a pretty high bar,” she said.
Baker signed the paid leave law in 2018, but it is only now, in 2021, that workers in the state are able to start accessing benefits. And it is only now that the popularity of opting out is becoming clear.
Albelda is confident that the program is still sound. But, she said, the current opt-out numbers are neither expected nor ideal. The concern is that, if too many employers opt out, the state will need to keep increasing the payroll tax to ensure the billion-dollar program is financially sustainable.
While experts agree it will take time to know the exact impact of employer opt outs, a key question for any insurance system is who’s staying in the pool and who’s leaving.
Associated Industries of Massachusetts represents around 3,300 companies across the state, including everything from huge financial services companies to manufacturers and corner grocery stores. In a survey of its members, the group found that over 40% had opted out.
“I think they tend to just be more comfortable dealing with private insurers versus a government program,” said Christopher Geehern, executive vice president of AIM, which lobbied against the initial legislation.
Geehern gives the state credit for getting such a large program up and running in a relatively short period of time. But, he said, many companies want to see how smoothly the state’s program operates before signing on. He said many of AIM’s members had dealt with other state programs, some of which have been widely seen as messy and dysfunctional.
“Companies interact with the unemployment insurance system and other systems,” he said. “Given that [the state’s paid leave system] was something completely new, I think many employers opted for the familiar.”
In the first few months since Massachusetts’s paid leave program launched, it has struggled to get payments out in a timely manner to those taking leave.
Small Companies Stick With State Program
Looking at AIM’s survey results, Geehern noticed a pattern in which companies decided to stick with the state program and which opted out. He found that smaller companies are staying in the state pool, but bigger companies are not.
That's not a coincidence, said Vanessa Costa, who co-owns Advantage Benefits Group in Worcester. Her group helps companies figure out employee benefits, and whether or not to participate in the state’s new paid leave program has been a hot topic.
She said it’s a no brainer for small companies — those with fewer than 25 employees — to stay in the state program because, the way the law’s written, those companies don’t have to pay the tax that funds this policy. So, for them, it’s a free ride.
Costa advised all the smaller employers she works with to stay in the state’s pool, “but pretty much 25 and up went towards private,” she said.
Citing privacy laws, the state would not disclose which employers had opted out. However, there are some big names on the list, including the Massachusetts Institute of Technology and Boston College. And the average size of an opt-out employer is over 200 employees, which is much larger than the median firm in Massachusetts.
That could be a problem, Albelda said, if these employers are not just large but they also have highly paid employees. Since the program relies on payroll taxes, which are a percentage of someone’s income, it hurts the fund when higher earners leave the state’s pool.
Payments But No Benefits
Another reason companies opted out this first year of the program is because the state collected taxes for 15 months before the benefits started kicking in at the beginning of 2021. This so-called pre-funding was necessary for the state to build up the fund required to run the program.
However, Costa said, “if you're talking a group with 50 [or] 100 employees, we're talking about a lot of money.”
For private plans, benefits start as soon as payments start. Avoiding those 15 months of pre-funding often more than covered the cost of a private plan this first year.
“We'll see if these employers come back again,” said Albelda, noting that the pre-funding is a once-off arrangement.
Going forward, the state will recalculate the tax rate needed to cover the program annually. Once it's announced, employers can decide whether or not they will apply to opt out.
Cheaper For Men
Whatever tax rate the state picks, it will be the same rate all around the state. Private insurers, on the other hand, can tailor their rates to specific companies.
“Industries that did very well with pricing, that we found, were construction industries, general contractors, utility contractors. I had tool and dye shops as well,” Costa said. “In some cases, we found a savings of 20% or more compared to the state rates.”
Private insurers have crunched the numbers and know workers in these male-dominate industries are not going to take as much paid parental leave, Costa explained. And for medical issues, Albelda surmised, insurers might be betting on men using work’s compensation instead of medical leave.
When it comes to female dominated-industries, such as childcare, dental hygienists and social workers, Costa found that the rates offered by private insurers were sometimes higher than the state.
What Does This Mean For The Program?
This picture — especially around the gender divide — worries Alicia Sasser Modestino, an economics professor at Northeastern Universit.
If you play this out, both the state and the private insurer rates could theoretically keep increasing — "that's the death spiral,” said Sasser Modestino.
“It's killing the state plan because we're letting the low-cost guys opt out into the private plan," she said.
Sasser Modestino is concerned about the economic consequences of allowing employers to opt out of the program. But she said there are social dynamics at play here, too. To avoid rates from their private insurer going up, male-dominated companies might discourage their workers from taking paternity leave.
“You're reinforcing, again, that stereotype of women being the ones taking on the caregiving,” she said.
There are a couple ways to address the popularity of opt-out, according to Sasser Modestino. Lawmakers could change the current law so that employers can't opt out, an approach she said might "erode employer support."
Or, she suggested, the state could put limits on private insurers, such as regulating whether they can price based on sex or how big the difference can be between sexes.
But other economists aren’t as worried.
Kit Baum, head of the Economics Department at Boston College, could see the state’s rates going up, but he doesn’t expect it to get out of hand. He said the paid leave payroll tax is not that expensive compared to everything else employers are juggling.
“This is one more line on the paystub,” Baum said. “I don't see that's going to trigger a mass running for the exits.”
Plus, he added, he doesn’t blame employers for opting out and choosing the best economic choice for themselves.
“The state has allowed for that action,” he said, suggesting the state could revise the law if needed.
Just like Romneycare was a model for Obamacare, Baum said, many are watching Massachusetts. The Commonwealth is one of just nine states and the District of Columbia to have paid family and medical leave laws on the books, and most of these laws are pretty new. Some states allow opting out, while others — like Rhodes Island — force all companies to participate.
“In many ways, this is a grand experiment,” Albelda said. “So, we'll see if [opt outs] weakens the pool.”
Still, Albelda is thrilled Massachusetts is doing this experiment. She points out that it gives almost every worker in the state access to paid leave when they need it most — but only if the program can stay afloat.