Arnold Kling  

Business and Health Care Costs

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Political Behavior... Disintermediation and Outsourc...

In an essay arguing against relying on linking health insurance with employment, I write


If employers bear the cost of health insurance, then I'm the Easter Bunny. It is fairy-tale economics to believe that "nice" employers give away health insurance, while "mean" employers withhold it. In reality, employers compensate their employees using a combination of cash and non-cash benefits...

when you factor out inflation, total compensation has gone up while take-home pay has gone down. The data prove that workers are paying more for health insurance.


The essay goes on to suggest that disintermediation is taking place, in that a smaller share of the labor force is working for employers that offer generous health insurance. This reflects some workers choosing to pay for health insurance themselves or to do without health insurance, as a way to increase take-home pay.

On another issue of "Who really bears the cost?" Alex Tabarrok writes,


If tenants benefit from a law that says apartments must have hot water then surely a law that says tenants must have hot water and a dishwasher benefits them even more, right? What about a law that says tenants must have hot water, a dishwasher and cable tv? By now the students have cottoned on to the idea that the rent will increase. Once you realize that the law causes the rent to increase it's no longer obvious if tenants benefit or if landlords are harmed.

For Discussion. Many people casually assume that employers will bear the cost of health insurance and landlords will pay for amenities because they can afford it. What is wrong with this thinking?


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TRACKBACKS (6 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/110
The author at Ashish's Niti in a related article titled Negative externalities in employer paid health ins writes:
    The situation of employer "paid" health insurance is more akin to landlord providing hot water to all his/her tenants with no individualized billing. That means, no matter how much hot water you consume, you always get the average bill (total hot wat... [Tracked on August 24, 2004 11:07 AM]
The author at Different Opinion in a related article titled No Hot Water, Cheap Healthcare - Who Pays? writes:
    Do economists in general think that most people in advanced societies that happen to find themselves...in apartments without hot water have done so thanks to their own rational choices? Isn't it likely that policies that deprives the poorest in an adva... [Tracked on August 24, 2004 3:29 PM]
COMMENTS (8 to date)
Mcwop writes:

Many assume that under universal healthcare employers will bear the cost of that system for their employees, as well as subsidize people that they do not employ. That was an assumption of Hillarycare. The proposal to add a payroll tax of 14-17% meant that employers with higher salaried employees would pay more into the system than firms with lower paid employees (e.g. McDonald's).

Boonton writes:

Another straw man gets attacked. Most arguments in favor of employer provided healthcare DO NOT revolve around the mythical moneybagged rich owner paying a tiny bit more to give millions health insurance. They revolve around the power of collective bargaining and group purchases that come about when an employer bundles together numerous individual health policies.

Bernard Yomtov writes:

OK, but here's a puzzle. When trying to reduce costs employers are vastly more likely to cut health care benefits than wages. So they might cut their contribution to health insurance by, say, $100/month per employee.

But employees ought to prefer a $100/month wage reduction to a $100/month cut in health benefits. Health benefits are after-tax income; wages are pre-tax. And incidentally, the wage reduction is better for the employer, since it also reduces payroll taxes.

What explains this, bearing in mind that however the costs are borne, it is the employer who makes this decision.

mcwop writes:
They revolve around the power of collective bargaining and group purchases that come about when an employer bundles together numerous individual health policies.

Not sure if your comment is directed at me or not, but I am curious as to what is the theoretical floor that premiums will drop to in large group purchases under universal health?

Canada's per capita health spending is about $3,200.

For a part-time worker (single person) at McDonalds earning $10,000 that is 32% of payroll. Single person earning $60,000 it is 5.3% of payroll. Single earner in a family of four the total cost is $12,800, if they earn $80,000 that is 16% of payroll. My question is does a company with full-time, higher earning, employees subsidize the costs of another employer with lower paid employees? How will the costs be spread?

Mats Lind writes:

I can't see that your argument on the TCS post bolis down to anything else than that adverse selection problems are best avoided by public insurance. Why don't you mention the enourmous costs for individual insurance? I'mean no insurer would accept you as an individual policyholder without more or less dissecting you first - and then charging you huge monthly bills.

I can't see why you were going on about the selection costs for small pools paid for by the employer while forgetting the huge costs for individual insurance. Why not try to underpin your claim that the public insurance should be small and basic. It seems in this article be rather pulled out of the air.

Boonton writes:
For a part-time worker (single person) at McDonalds earning $10,000 that is 32% of payroll. Single person earning $60,000 it is 5.3% of payroll. Single earner in a family of four the total cost is $12,800, if they earn $80,000 that is 16% of payroll. My question is does a company with full-time, higher earning, employees subsidize the costs of another employer with lower paid employees? How will the costs be spread?

Probably they will be spread roughly equally. Most companies that have health insurance seem to do this already, I would imagine they probably would keep doing it. As for the size of payroll, I agree it is significant for a $10K per year employee but less so for the $30-$60K per year ones. There is no geting around the fact that if we decide everyone will receive a certain level of healthcoverage it will cost a certain per capita amount. Naturally this amount will be pretty higher as a % of a low income person's wages.

John Thacker writes:

Boonton--

If you actually followed Professor Kling's link and read his essay, you would have noted that he fully discusses the benefits of risk pooling and mentions the "sobering" possibility that disintermediation threatens employer-based insurance and risk pooling. He notes the problem.

You are of course correct that the sophisticated argument in favor of certain interventions is not the same as the vulgar, of course. Yet the vulgar does get made and believed too often, and it should be corrected. (Unless you're willing to accept people believing falsities when it serves your higher truth.)

William Woodruff writes:

The optimal health care system would be designed in such a way in which patients would pay indirectly for making poor choices, not employers.

The optimal health delivery system would maintain the profit motive of sellers, however remove their lobbying capabilities, specious argument about "unsafe re-importation" and ensure perfect competition in the market for physicians...

William

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