Arnold Kling  

The Incidence of Health Insurance

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I recapitulate some basic economics in my latest essay.


American firms will not become more competitive by shedding health care costs, unless in the process they can reduce the net compensation paid to workers. Cutting health insurance benefits and raising take-home pay or payroll taxes by an equivalent amount is a wash.

My liberal friends are all telling me that our auto companies would be more competitive if we had national health insurance, as they do in Canada. The concept that most people seem to miss is the theory that says that the cost of employer-provided health insurance is most likely to be borne by workers, not by employers.


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The author at btw.net Weblog in a related article titled Part of the stratification of Healthcare writes:
    TITLE: Part of the stratification of Healthcare URL: http://radio.weblogs.com/0115330/2005/10/29.html#a500 IP: 68.3.38.237 BLOG NAME: btw.net Weblog DATE: 11/05/2005 03:16:16 PM [Tracked on November 5, 2005 3:16 PM]
COMMENTS (11 to date)
daveg writes:

I often wonder why large, insurance paying companies, don't demand that smaller, non-insurance paying companies, start providing health care.

Hospitals treat all patentients, so the cost of the uninsured must be borne by the insurance paying companies. That is, the companies that don't provide insurance are free riding on companies that do, to some degree.

Robert writes:

In a sector such as health care, where competition, if it exists, has been channeled from price to (perceived) quality, reducing the consumer's perceived price will, once equilibrium has been restored, tend to produce higher actual prices, with little increase in supply. (Why? because if the sector succeeds in acting like a monopoly, additional supply is difficult to recruit where it would lower price and reduce total profits.)

A state health plan can counteract this tendency by imposing price controls. Private insurers cannot do this, unless they become large enough to exert market power themselves.

Both state and private insurers have the ability to offer discounts to their customers for practicing prevention. (A South African acquaintance recently told me that he gets discounted movie admission with his health insurance; the insurer wants to encourage its customers to enjoy themselves on the weekend...) But private insurers have less incentive to do this, because a customer's tenure with any single insurer is often short enough that the benefits of preventive practices will likely be reaped by some other insurer.

Honestly, I'm predisposed against the idea of state health insurance. But it seems that private insurers may be at a competitive disadvantage with the health care industry in pursuing their interest in keeping costs down.

spencer writes:

You are completely right. The reason health care costs are lower in Canada, Europe, etc., is that those government decide to spend less on health care. Consequently, they ration health care with nonprice and other measures.

But, the differences in the outcomes between US and other OECD countries health care systems does not seem to be that significant. In some ways they get better results and in some ways we get better care, but on balance they seem to be about the same.

So, doesn't that leave the US with the problem of why is our healthcare so expensive. Part of the higher costs is obviously our structure of having the system provide insurance through employment.
But that is not all of the problem by any means.

AC writes:

I just love my Canadian car. Thanks to Canada's national health care, they have a booming auto industry, right?

Bernard Yomtov writes:

I think you are oversimplifying the argument. The claim is that US healthcare costs are too high and that reform would lower them. Then auto workers could receive the same actual benefit - measured in terms of level of care - at lower financial costs.

You may disagree with the assumption about lowering costs, but if it holds then your friends' claims are reasonable.

Barkley Rosser writes:

Your argument would hold if employers paid the health insurance. But national health insurance is paid more broadly by workers and non-working citizens across the whole society. Of course if that national insurer is able to get lower costs than the private system, then there is clearly an advantage.

Three reasons for higher medical costs in the US are 1) higher drug costs, 2) higher costs of malpractice insurance, and 3) extra administrative costs associated with processing patients in private insurance where the companies are trying not to pay for the customers. Number 3 would be eliminated by national health insurance, but Numbers 1 and 2 are somewhat separate issues.

James writes:

Barkley,

Why is it that the high costs of health care are assumed to be determined by the suppliers of care? Aren't various health care subsidies also partly to blame for bidding up the prices of drugs, doctors visits, etc? Before you jump to the conclusion that a nationalized system could have lower costs, consider how the demand for drugs and care would change if the cost to the customer were to fall. Then consider how producers would change their prices in response to the higher demand. Do you really think that the cost reductions from totally nationalizing the industry are sufficient to offset the supply side response to a subsidy?

Victor writes:

One item that I don't see discussed but that may be relevant ... private insurers frequently charge differential premiums by industry as well as each individual company's experience.

Therefore, shifting from private insurance to nationally-mandated insurance shifts costs onto healthy individuals from unhealthy ones. Everything that follows in this comment is an elaboration on that point for those who might be skeptical.

The point with your example is that if workers in auto companies are sicker, on average, than workers elsewhere in the economy, then their healthcare costs more than workers elsewhere. Let's say it costs them $5 in your example, meaning they could get paid $15 per hour in cash. Another firm, let's say Microsoft, may only have $1 in health care costs and is able to pay their workers $19, but because the worker's best outside opportunity is only for $15, that's all they have to pay in the market.

Under nationalized insurance costing $3 per person, Microsoft will become less competitive. GM's costs, on the other hand, will drop, making GM more competitive and/or enabling them to pay their workers up to $2 more.

Under nationalized health insurance, we would therefore tend to attract sicker workers in industries that make people sicker and/or we would remove incentives for employers to provide workers with healthier work environments. Therefore, I do suspect that your liberal friends are correct, because I would also suspect that manufacturing jobs in auto plants do not tend to be the healthiest work environments.

Interestingly, there could be testable empirical predictions from this theory. Employer-provided workout facilities, health monitoring fairs, disease management tips or programs, etc., are all actions US employers are beginning to take seriously. Are these fads catching on in Europe and Canada? The other testable factoid -- are we exporting dirty jobs and importing cleaner jobs -- is likely working in favor of this theory, but is also likely driven by other obvious things, like our relative wealth.

Sorry for the length. I know this may be a second-order effect, but I suspect this is as large an effect as most other cost-control fads.

Mstanley writes:

This post has to be wrong. A government single payer health financing system could relieve employers of the health insurance burden. It is true that health insurance paid either voluntarily by employers *or* mandated by a payroll tax is a tax on job creation. But there are numerous ways of financing a single payer health care system out of general revenues that do not involve a payroll tax. The progressive income tax springs to mind. We can argue about how distortionary that would be. But it is not a tax on job creation, and it will not affect employer hiring decisions in the same way as a direct payroll cost.

James writes:

Mstanley,

A tax on the sale of labor (such as an income tax) will have the same result as a tax on the purchase of labor (such as a payroll tax). Progressivity makes the tax even more distortive because it penalizes workers and employers in jobs with higher marginal products, thus discouraging the creating of high productivity jobs.

Craig writes:

Canada's lower health care costs have come not only through its willingness to tolerate a lower level of care, but through its abandonment of spending for its national defense.

It isn't simply a matter of the government assuming the costs of health care -- after all, it's the citizens who take on that burden.

The U.S. still spends a lot of money on its Armed Forces. The Canadians once did, they don't any longer. What was once called the peace dividend is now, for Canada anyway, the American dividend. No matter how much they criticize us, we'll still defend them, because our defense depends on theirs.

In the meantime, all that money that might have once gone to paying for the Canadian Armed Forces can be diverted to the hospitals and attract some of our business over there to take advantage of it.

They aren't so dumb after all.

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