David R. Henderson  

John Goodman's Prediction Coming True

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Internal documents recently reviewed by Fortune, originally requested by Congress, show what the bill's critics predicted, and what its champions dreaded: many large companies are examining a course that was heretofore unthinkable, dumping the health care coverage they provide to their workers in exchange for paying penalty fees to the government.

That would dismantle the employer-based system that has reigned since World War II. It would also seem to contradict President Obama's statements that Americans who like their current plans could keep them. And as we'll see, it would hugely magnify the projected costs for the bill, which controls deficits only by assuming that America's employers would remain the backbone of the nation's health care system.


This is from Shawn Tully, "Documents reveal AT&T, Verizon, others, thought about dropping employer-sponsored benefits," Fortune, May 6, 2010.

Here's what health economist John Goodman wrote on April 15:

The Bizarre Subsidies. Look at it from the employee's point of view. The new law says that an employee must have insurance costing, say, $15,000 for family coverage in 2016. Remembering that employee benefits are a dollar-for-dollar substitute for wages, that implies that a previously uninsured $30,000-a-year worker will get a 50% cut in pay. Further, the only help this worker will get from Uncle Sam will be the ability of the employer to pay the premiums with pretax dollars. That's worth about $2,000. (See the chart here.) On the other hand, if this worker can get the same insurance through the newly created health insurance exchange, the federal government will pay almost all the premium and reimburse most out-of-pocket expenses to boot. That's a total subsidy worth more than $19,000.

It follows that every worker in his right mind at this income level is going to want to work for a firm that does not offer health insurance and pays cash wages instead. Yes, this employer will have to pay a $2,000 fine. But the fine is well worth the opportunity to obtain a $19,000 benefit.


Goodman wasn't the first to make the point, but he's beaten the drum hard on this. It looks as if what he predicted might well happen.

The documents that Fortune reviewed were ones that the companies had sent to Congressman Henry Waxman's House Energy and Commerce Committee. Remember how that happened? Waxman had scheduled hearings because he was upset that the companies were reporting the effect of the health care bill on their earnings. He wanted to bring them to Washington and lambaste in front of the cameras.

Never mind.

Tully writes:

The request yielded 1,100 pages of documents from four major employers: AT&T, Verizon, Caterpillar and Deere (DE, Fortune 500). No sooner did the Democrats on the Energy Committee read them than they abruptly cancelled the hearings. On April 14, the Committee's majority staff issued a memo stating that the write downs were "proper and in accordance with SEC rules." The committee also stated that the memos took a generally sunny view of the new legislation. The documents, said the Democrats' memo, show that "the overall impact of health reform on large employers could be beneficial."

Nowhere in the five-page report did the majority staff mention that not one, but all four companies, were weighing the costs and benefits of dropping their coverage.

HT to Ross Douthat.


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COMMENTS (15 to date)
kebko writes:

This way the Democrats can blame the employers for the loss of coverage.
If this bill achieves one thing, and that is to kill employer-provided health insurance, then that's actually quite good news.
Unfortunately, in the meantime, employers are bound to be demonized for political gain.

Ella writes:

This is one time I think demonizing the companies isn't going to work, simply because the bill was so wildly unpopular to begin with. Companies will (or could) seem like victims in this.

I recently took a job after being self-employed for over 5 years. I also kept my personal health insurance because I was convinced that my employer would drop its coverage as soon as Obamacare kicks in. I have no idea if it will even be possible to buy health insurance at this time next year, and I didn't want to lose coverage. At least I'll have it as long as private insurance exists (which I think will be less than 5 years).

Bob Murphy writes:

David, the real question is, did the people in Washington know all along this was going to happen, or did they realize too late and just ran with it?

I have long since abandoned the idea that everyone in DC is well-meaning but stupid. But now I'm still not sure between the following:

(A) They do things that benefit them (or their friends) and they don't care if it hurts the country,

or

(B) Hurting the country (such as destroying the dollar, getting the military bogged down all over the place, ruining health care) for some reason, is part of their actual plan.

Sisyphus writes:

When you combine this with the implications of the mandated coverage up to age 26, doesn't it create an even greater incentive for people under age 26 to seek out employers that take the penalty rather than pay for health insurance? They get paid more by their new firm, and presumably subsidized insurance from their parents' employer. Or if they can't get the insurance from their parents, the worst that happens is they opt into the exchange only when they need it.

I had not realized how much of a cost shift from older to younger people this could entail until now. And isn't that the opposite redistributive effect that health insurance reform normally seeks?

Rebecca Burlingame writes:

I only wish that our government could realize just how much of this pain and suffering could be avoided by allowing perhaps one hundred new medical universities to open. And how much money would the government have to spend in the long run, were this to happen? Not near as much as is what is projected now.

mulp writes:

Given all the economists who can analyze the costs to corporations of being social welfare providers to their employees, please answer these questions:

Why do employers provide health care benefits at ever greater costs with the long standing government dictates on the structure of their benefit plans?

Why would the mere addition of a penalty for failing to provide an expensive health care benefit under the same government dictates on the structure of their benefit plans make it cheaper to drop the health benefit?

Is the corporate decision making purely driven by the personal interests of the corporate management who know they might not be able to buy health insurance in the private market, so they have the firm buy it, and buy it for every employee to comply with government dictates?

Does health reforms denial of insurance company ratings of customers and denying coverage or setting rates based on preexisting conditions make the corporate manage secure in their ability to buy good health insurance?

Or is this signaling on the part of multinational corporations, they want the US government to provide health care to their employees just like in all the other nations they have major operations, because these corporation believe this is a function for government, not the private sector?

MernaMoose writes:

(B) Hurting the country (such as destroying the dollar, getting the military bogged down all over the place, ruining health care) for some reason, is part of their actual plan.

It's part of their plan because it's part of their idealism. Haven't you gotten the drift of the Vision that drives the Left? And the attempts at having a Vision that drives the Right?

The Left knows what it wants (Euro Socialism), and it wants it now. If it hurts, it's just part of the necessary transition to their idea of a brighter day.

The Right doesn't have the [stuff] to oppose them on principle, because the Right no longer really has any principles (except maybe they spend a little less) so they oppose the Left, well just because.

fundamentalist writes:

You didn't need to be a professional economist to understand that would happen. Around the water cooler at work, everyone recognized that would happen long before the bill was passed. But it's actually a good thing. Employer-paid insurance is the main cause of all of our health care problems because it shields the consumer from the real costs of healthcare. Most Americans are not upset with the high cost of healthcare because they don't know it's high because their employer pays most of the cost. If every company would quit paying the premiums and force employees to pay the $15,000/yr for family coverage, then Americans will get upset about the high cost of health care and demand some real reform.

Yancey Ward writes:

In the end, the penalties will be raised and become an "employer-paid" payroll tax. We will still have employer-based healthcare coverage, but the businesses will no longer be able to shop around for a better deal- most of their control over the system will be removed to the political arena.

JRip writes:

In Germany, France and the UK the new physician graduates with zero tuition debt. College and medical school are free.

Shall we assume that in most of western Europe the scheme is the same?

JRip writes:

Frankly... If we want jobs for folks in America we need to approach this from the employer's POV.
What are the components of employee cost? Salary, local taxes, mandated benefits, health care, the local cost of living etc. etc.
If there is significant regional or global variation in cost-to-employ jobs will move toward lower cost.
Dems and Reps, right and left should remove the direct cost of health from American business.

Rachel writes:

Could an employer not offer health insurance - but provide wellness programs to employees? Say a nurse to provide primary care & front line status for the best specialists? That way, the government covers most of the cost for health care, but the employed still get the best treatment.

AMcguinn writes:

"In Germany, France and the UK the new physician graduates with zero tuition debt. College and medical school are free."

Not true.

BMA survey : "Respondents in their final year of study (defined as those expecting to graduate in 2009) reported an average level of total debt of £22,821 with the highest level of total debt reported as £65,941."

http://www.bma.org.uk/careers/medical_education/student_finance/studentfinancesurveys.jsp

John Fast writes:

mulp wrote:

Why do employers provide health care benefits at ever greater costs with the long standing government dictates on the structure of their benefit plans?

Because those benefits are free of income tax, so the government in effect subsidizes them. Consider a worker in a 33% tax bracket (counting both income tax and payroll tax and the employer's share of the payroll tax). In order for the worker to get health insurance for which the insurance company charges $10,000 per year, the employer would have to pay $15,000 in wages *or* pay $10,000 directly for the benefit.

Why would the mere addition of a penalty for failing to provide an expensive health care benefit under the same government dictates on the structure of their benefit plans make it cheaper to drop the health benefit?

It's not the addition of the penalty that causes companies to drop; the drop is caused by the "public option" plans being so cheap (i.e. being offered at a loss) compared to the equivalent level of private insurance.

Is the corporate decision making purely driven by the personal interests of the corporate management who know they might not be able to buy health insurance in the private market, so they have the firm buy it, and buy it for every employee to comply with government dictates?

I would say that the "take from the poor, give to the rich" rules for tax-deductible benefits make that a factor, which is why sensible economists -- even the ones who are liberal Democrats -- have been attacking those rules for more than 30 years. During his presidential campaign, Obama ran ads that attacked McCain for wanting to end this take-from-the-poor-to-give-to-the-rich rule, which convinced me Obama was unfit to serve.

Does health reforms denial of insurance company ratings of customers and denying coverage or setting rates based on preexisting conditions make the corporate manage secure in their ability to buy good health insurance?

I doubt it, and think it would actually have the opposite effect, by making them worry they would have to pay the same rates as someone who suddenly got sick and then staggered into an insurance office demanding coverage.

Or is this signaling on the part of multinational corporations, they want the US government to provide health care to their employees just like in all the other nations they have major operations, because these corporation believe this is a function for government, not the private sector?

Some people may call me cruel or heartless, but I still don't believe it's the government's job to give subsidies to greedy multinational corporations, even if those big business executives *really* want those subsidies a lot. Instead, I'd rather use the money to help the working poor.

And if I were Joe Barton, the ranking minority member, I'd demagogue like crazy and demand that the hearings go on, and hold "unofficial" hearings of my own, perhaps at the Cato Institute!

John Goodman writes:

I think the average representative or senator had no idea what he was voting for when he voted for (or even against) Obama Care. But some staffers must have known that the Rube Goldberg contraption they were creating would eventually lead to the demise of private health insurance and its replacement by a single payer, government run plan.

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