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Health Care Costs Crippling U.S. Business?

Not so says CBO’s Doug Elmendorf.

CBO director Douglas W. Elmendorf explained this last week to the Senate Committee on Finance, which is chaired by Max Baucus, a leading proponent of government health care. The point is that for employers, health care is merely a part of total compensation: It reduces cash compensation for employees but it does not increase costs of employment. To argue otherwise is to argue for lower total U.S. compensation — that is, lower wages for U.S. workers. Said Mr. Elmendorf, “the costs of providing health insurance to their workers are not a competitive disadvantage to U.S.-based firms.”

This is somewhat cryptic, in my view. What employers ultimately care about in hiring a worker is the total cost of hiring that worker. They don’t, for instance, look simply at the wage and ignore the costs of benefits. Employers look at all costs. If labor markets are competitive and there were no taxes on labor income then workers would likely rather receive their “health care benefits” as wages instead of benefits and then go out and purchase their own health care. Think of it this way, if a worker is paid $25,000 and then goes out and buys $1,500 worth of health insurance, or the employer pays the worker $23,500 and provides a $1,500 of health insurance the worker is indifferent between the two. Now if there are taxes and health benefits provided by the employer are given special tax treatment then the worker would prefer the option with benefits. But note, that the employer incurs the same total costs of employing the worker. Thus, the notion that health care benefits and the rapid rise in health care costs is a competitive disadvantage to the employer would also be true if it were rapidly rising wages and not health care benefits.

Somehow I don’t think those making the competitive disadvantage argument of health benefits would make the same argument about wages, but the logic is essentially the same.

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About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research.

Comments

  1. So is it ok for me to reduce my employee’s wages to cover the premium rate increases when I renew my company’s health insurance plan this year? Hey, I’m not being facetious. I just want to know which actions are more likely to get me demonized and taxed more heavily.

  2. Steve Plunk says:

    Crippling? Crippling would be so bad we couldn’t do business at all. It’s not crippling. Hurting? Hell yeah. It hurts us like any other rising expense. Except this is a rising expense we don’t dare do away with.

  3. PD Shaw says:

    As health care costs become a larger percentage of employee benefits, businesses increasingly compete on health care benefits. This type of competition favors the government and health care industries. It hurts small businesses, who for the most part can’t compete, so they drop it. Most employees do not experience annual productivity increases that match the increases in health care costs.

    (The answer to this problem, which I think is serious, is to disengage health care insurance from employment, but I doubt that will happen any time soon)

  4. Drew says:

    Steve –

    Somewhat cryptic? I may misunderstand.

    I have tried to point out for years (unsuccessfully) that cash wages and benefits are almost interchangeable from the employers perspective. (I know – certain tax issues. But a close explanation for slow pure wage growth)

    PD gets it right, IMHO. Business as third party payer was the first step in de-coupling health care price discipline from the consumer. We reap what we sew. Health care is now “free,” and its cost escalates accordingly.

  5. sam says:

    @PD

    The answer to this problem, which I think is serious, is to disengage health care insurance from employment, but I doubt that will happen any time soon.

    That’s what national health care seeks, right? Let’s leave that aside, though. If health care insurance was divorced from employment, wouldn’t employers still have to compete for employees by increasing wages to address the cost of individually-purchased insurance? And if health care costs keep rising…

  6. Brian Knapp says:

    If labor markets are competitive and there were no taxes on labor income then workers would likely rather receive their “health care benefits” as wages instead of benefits and then go out and purchase their own health care.

    Except for the real costs of insurance purchased as an individual rather than through a group contract.

    Think of it this way, if a worker is paid $25,000 and then goes out and buys $1,500 worth of health insurance, or the employer pays the worker $23,500 and provides a $1,500 of health insurance the worker is indifferent between the two.

    Like stated above, 1500 bucks buys you exponentially more insurance through a group than individually. More to the point, an individual can be DENIED insurance due to a risk assessment from the provider or the premiums and care can be prohibitively expensive.

    Indifference only matters if the individual has no health care issues to consider.

  7. sam says:

    This discussion and Brian’s comment reminded me of this from NRO:

    Tuesday, December 19, 2006

    Christmas Present [John Derbyshire]

    My health insurer has just notified me, in a brief form letter, that my monthly premiums are to rise from $472.33 to $857.00 on January 1st. That’s an increase of 81 percent. ***E*I*G*H*T*Y*-*O*N*E* *P*E*R*C*E*N*T*** Can they do that? I called them. They sound pretty confident they can. Ye gods!

    12/19 11:44 AM

  8. odograph says:

    Wasn’t the bigger problem that many companies (GM?) built health insurance into their retirement packages … it it was rising costs for workers no longer working that broke the bank?

    Charles’ example is similar though.

    The costs of past decisions and past pay structures change as health care costs outstrip inflation, going forward.

  9. Steve Verdon says:

    Sam,

    That’s what national health care seeks, right?

    No. It could be decoupled simply by making the purchase of health care insurance by individuals subject to some sort of tax credit.

    If health care insurance was divorced from employment, wouldn’t employers still have to compete for employees by increasing wages to address the cost of individually-purchased insurance?

    No. However, in a competitive labor market wages would likely rise by the cost associated with the cost of such health care benefits. To address the issue of pre/post tax income that tax code would have to be changed. Bush tried something like this. Economist Jason Furman, one of Obama’s advisors during his campaign, supported the idea.

    Brian,

    Like stated above, 1500 bucks buys you exponentially more insurance through a group than individually.

    We over-consume in terms of health care anyways. That is why health care costs rise so quickly.

    But yes, you are right, pooling equilibria have the healthy subsidizing the unhealthy. In a market all pooling equilibria are “broken” by seperating equilibria since the healthy can always leave the pool and go out on their own and save money.

    More to the point, an individual can be DENIED insurance due to a risk assessment from the provider or the premiums and care can be prohibitively expensive.

    Yes some people would be uninsurable under a purely market based insurance system.

    Indifference only matters if the individual has no health care issues to consider.

    People with prior health concerns are not eligible for insurance since insurance can’t work in that case. You can’t buy car insurance once you get into an accident. Same thing works for health care insurance.

  10. anjin-san says:

    simply by making the purchase of health care insurance by individuals subject to some sort of tax credit

    Real simple. Unless, of course, you get turned down because of a prexisting condition.

  11. Thus, the notion that health care benefits and the rapid rise in health care costs is a competitive disadvantage to the employer would also be true if it were rapidly rising wages and not health care benefits.

    I hesitate to get involved in this because I suspect it will end badly… But of course, there would be a competitive disadvantage that would accrue if wages rose faster than productivity. This is, isn’t it, precisely the argument about the negative consequences of unionization?

    The challenge for the United States is that our health care costs are higher than the rest of the world’s, and it is also rising faster than in many other countries. And yes, it is the same consequences as would arise from wage increases decoupled from productivity gains. And true, people would complain less if that were what was occurring… but is your concern with the differential impact assumed by casual observers between health care costs vs. wages? Or are you taking issue with the broader argument that our health care costs — both in absolute terms and in their growth rate — constitute a source of competitive disadvantage?

  12. sam says:

    @Steve

    People with prior health concerns are not eligible for insurance since insurance can’t work in that case. You can’t buy car insurance once you get into an accident. Same thing works for health care insurance.

    I wonder how many of us would be denied coverage, or only offered coverage at very high rates. if genetic testing was made a precondition of purchase? Noting that possessing the genetic marker for a condition does not mean the condition will be expressed.

  13. markm says:

    Wasn’t the bigger problem that many companies (GM?) built health insurance into their retirement packages … it it was rising costs for workers no longer working that broke the bank?

    Kinda sorda. At least with GM it’s salaried pension (w/healthcare) was/is overfunded meaning GM no longer needs to put money into the fund…BUT…the bigger point from above related to that…competition. Competition over the years, specifically when times were good and good people were hard to get and harder to keep, healthcare was the big carrot to keeping them. If GM did it, FORD and Chrysler had to…it was a healthcare war. It worked well for years and years….not so much now.

  14. Steve Verdon says:

    Bernard,

    ….but is your concern with the differential impact assumed by casual observers between health care costs vs. wages? Or are you taking issue with the broader argument that our health care costs — both in absolute terms and in their growth rate — constitute a source of competitive disadvantage?

    I don’t think health care costs are a competitive disadvantage. A firm is going to only hire a worker when it thinks it can get more value from that worker than the cost of employing that worker up to the margin (where the last worker hired contributes precisely what he is paid). That a firm sees its health care benefits rising faster would mean the wages would rise at a lower rate. Now obviously if total compensation rises high enough here, for whatever reason, that firms here are no longer competitive such firms would shut down. However, the reasons for this don’t have to be related to health care. Cartels could cause this kind of result, for example.

    Casual observers on the other hand try to make the argument that health care costs are a competitive disadvantage. In effect, that we should subsidize American business to compete with foreign businesses by having tax payers pay for health care.

    sam,

    I wonder how many of us would be denied coverage, or only offered coverage at very high rates. if genetic testing was made a precondition of purchase?

    Probably lots. In a world where information is perfect insurance is not possible. Obviously we don’t live in such a world, but with more information about potential health risks would likely influence premiums people paid.

  15. Now obviously if total compensation rises high enough here, for whatever reason, that firms here are no longer competitive such firms would shut down. However, the reasons for this don’t have to be related to health care. Cartels could cause this kind of result, for example.

    Well, sure. It COULD be from any number of reasons, but the concern is that it is precisely health care costs that are the problem right now… And part of the reason is that wages are not perfectly adjustable. Indeed, with health care costs rising as fast as they are, we should be seeing actual downward pressure on wages, which is difficult for all sorts of reasons — collective bargaining agreements, social expectations, etc. So the health care costs increase, wages stagnate but don’t decline… and the end result is that potentially costs per working increase faster than productivity here, though not necessarily elsewhere.

    Now, ultimately, a lot of the concern is focused on the specific issue of the interaction between wages, health care, manufacturing jobs, and the status of high school educated workers. I suspect for many the issue of the competitive disadvantage of health care costs is a shorthand way of talking about the decline of U.S. manufacturing and the plight of blue collar workers, no?

  16. odograph says:

    I wonder how many of us would be denied coverage, or only offered coverage at very high rates. if genetic testing was made a precondition of purchase?

    FWIW, when I went through, and then off, COBRA, for semi-retirement … the insurance companies thought up all kinds of crazy reasons not to cover me. They all denied coverage.

    I had to write a letter and say each point was wrong, one by one, and then they said OK.

    That led me to believe that, at least in that place and time (California around 2000) the default answer was “no.” They wanted you to actually prove you were healthy.

    (Because I’d been to a chiropractor once, and only once, to ask about my shoulder … Blue Cross denied me and suggested I contact the California “major health risks” fund.)

    I think the only reason most people don’t know how messed up our system is, is that most people are healthy. You only find out if you get sick. That’s a bit of a harsh catch-22, in my opinion.

  17. Janis Gore says:

    That’s enough. Dr. Joyner did it, and now Drew has started, too.

    I just started sewing again, and it’s a lot more precise than anything you’re doing here.

    One sews shirts and dresses. One sows seeds and discord.

    You reap what you sow. You wear the other.

    The internet is destroying the English language.

    (And the past tense of “lead” is “led.”)

  18. odograph says:

    I admit that I too often type fast and don’t look back, and I’m a bad (or semi-dyslexic) proofreader … but I think I did use “led” as the past tense of “lead.”

    Google has 643,000 instances of “led me to believe” … which may not actually be enough these days to claim correct usage.

    But yes … the medium is not exactly composition. It is something above text messaging, IMO, not not that much higher.

  19. Janis Gore says:

    Not to point to you odograph. That flaw is everywhere now, including books and church bulletins.

    I’ll retire my grammarian now.

    Go on with your discussion.

  20. Bithead says:

    Host we appear to have gotten trapped into a conversation about the meaning of words, LET US contemplate momentarily the meaning of the word “benefits”.

    Apparently getting something for nothing, JUST BY PASSING A LAW… isn’t all that beneficial. Everyone getting something for nothing, has apparently broken our ability to get anything. Who would have thought it?

  21. Janis Gore says:

    As a Ph.D., Dr. Joyner needs to be aware of his influence.

  22. Brian Knapp says:

    People with prior health concerns are not eligible for insurance since insurance can’t work in that case. You can’t buy car insurance once you get into an accident. Same thing works for health care insurance.

    With all due respect, the two aren’t really at all comparable. Conditions often exist that with proper treatment can prevent life threatening situations.

    Severe diabetes is one such case. But because of the reality of the hyper inflated market mostly caused by insurers, where those treatments are affordable through insurance, they are prohibitively expensive to individuals without it.

    As a result, people aren’t able to pay for proper medication or treatments, as necessary in the case of cystic fibrosis for instance, and they are forced to forego those treatments and succumb to death in an inhumanely excruciating fashion, or wait until their condition merits long-term hospital stays of which the tax payer shoulders 100% of the super hyper inflated costs associated with that.

    Take severe Crohn’s disease for example. With insurance, it merely costs monthly premiums and the out-of-pocket maximum amount to pay for common treatment. This comes to around $5,000/year. Without insurance, the cost of medication can be around $30,000/year. Good luck getting covered without a group plan. Treatment can keep you a very productive taxpayer. Lack of treatment will likely end up forcing disability after painful intestinal resections, a high risk of cancer, and well, you see where that goes.

    Now, the beauty of the group contracts is that the insurer is forced into allowing members coverage for pre-negotiated prices. But, because the majority of people of the group are relatively healthy profit factories, it decidedly mitigates the risk to the insurer.

    This is a win-win because people who need it get covered, taxpayers are out of the equation, and insurers make money.

    The problem is that this system puts an undue strain on small business to compete because of the contract terms. They don’t have enough people to make it profitable so the premiums can be sky high.

    And since most Americans are still employed by small business, this leaves a large majority of people who need coverage out on the street. This is the current disgusting state of health care.

    So do we say “screw you” to the diseased and send them off to a valley somewhere to rot, or do we try to come up with a solution that doesn’t only benefit the healthy elite?

    The system we need is one that covers those who need it; it relieves the burden off small business in order to promote free market competition and entrepeneurship; it relieves the pressure from hospitals to write off inflated costs and thus eases taxpayer responsibility; and it standardizes and streamlines a bureuacracy that gives the government a run for its money.

    What system is this? I haven’t a clue, but I think this is the direction it needs to take.

  23. odograph says:

    I think Brian, that those are the inconvenient truths for free market insurance advocates. The (similar) example I gave was of a 14 year old with a pacemaker. How does the market provide him cheap insurance through life, when it is easier to just exclude him?

    Since the free market folk don’t really have a solution for him, they must write him off somehow, or at least put the inconvenient truth out of their minds.

  24. Steve Verdon says:

    Now, ultimately, a lot of the concern is focused on the specific issue of the interaction between wages, health care, manufacturing jobs, and the status of high school educated workers. I suspect for many the issue of the competitive disadvantage of health care costs is a shorthand way of talking about the decline of U.S. manufacturing and the plight of blue collar workers, no?

    The data that I’ve seen, which is not very precise, indicates that wages are growing at quite a bit slower rate than benefits. The only problem is if total compensation grows faster than productivity. If that happens then yes, there is a competitive disadvantage. I don’t think that is the case though, and it is incumbent on those making the claim to put up the evidence. So far, all I’ve seen is claims and damn little evidence.

    As for manufacturing jobs I think it is time to start considering that those jobs are going to go the way of the dodo. Why? Technological advancement. I know lots of peopel get their panties in a knot over off-shoring but I’d say that the largest “destroyer” of jobs is technological advancement. How many people work in the agricultural sector now vs. 100 years ago?

    As such, getting a good job with the kind of preperation high school students get nowadays might become increasingly more difficult. Perhaps it is time to rethink how high school works. Maybe there needs to be a two track system. One for those who have the talent and desire to go to college and another for those to learn trades that pay well–i.e. skilled jobs that don’t require a college education. For such a job having a grasp of chemistry and biology might not be so important. Just a suggestion, feel free to shoot it down.

    Sam,

    With all due respect, the two aren’t really at all comparable. Conditions often exist that with proper treatment can prevent life threatening situations.

    I think you are a bit confused, which is understandable. I agree with what you are saying, but insurance isn’t the idea that your health care is paid for by other people. Insurance is where you enter into a contract where the costs of large an rare outcomes are mitigated by the premiums you and others buying the contract pay. As such, routine treatments should NOT be covered. That would be like having car insurance that covers oil changes, tires, and replacing a worn out radiator.

    In other words routine and planned health care issues should be paid by the individual and not covered under a health plan. For example routine check-ups should be paid for by individuals–completely. Eye exams, gynocological exams, and pregnancy to name some examples.

    Now a person born with diabetes cannot get insurance because there is no probability associated with the event. Further, while routine care can reduce the probability of further medical complications it cannot rule all of them out. As such, the person with diabetes is going to be in a difficult situation when trying to obtain insurance. How do you determine if a given outcome is “bad luck” or due to the pre-existing condition?

    As a result, in this case a market for health insurance will not cover these people. I hesitate to call it a market failure becuase this is what the insurance market is supposed to do. Now, what we do as a society to address this issue is a different question.

    Now, the beauty of the group contracts is that the insurer is forced into allowing members coverage for pre-negotiated prices. But, because the majority of people of the group are relatively healthy profit factories, it decidedly mitigates the risk to the insurer.

    This is a win-win because people who need it get covered, taxpayers are out of the equation, and insurers make money.

    No it isn’t. What you are describing is an insurance pool. In a market any pool like the one you described will be “broken” by seperation. That is, suppose you have a pool with 1,000 people in it. Suppose the expected/average cost for those 1,000 people is $1,000,000. Thus the premium is $1,000/person. But suppose there are 100 people in that pool whos costs are $500,00 and remaining 900 people have a cost of $500,000. Now another insurance firm could “skim the cream” here by offering an insurance contract to the 900 with a premium of $556/person. These 900 would immediately switch leaving the 100 people holding the bag for $5,000/person.

    In other words, in your “win-win” the healthy are losing out by subsidizing the unhealthy. Now if we were in a situation were everyone started out healthy and poor health was a truely random event one could argue that initially such a pool might look attrative since nobody knows who is going to be healthy and who is going to unhealthy. However, we do not live in such a world. There are those with pre-existing conditions and poor lifestyles that can make pooling outcomes very hard to sustain without the coercive power of the state.

    So to say this is a “win-win” is not accurate when you need coercion to obtain that outcome.

    Odograph,

    How does the market provide him cheap insurance through life, when it is easier to just exclude him?

    Since the free market folk don’t really have a solution for him, they must write him off somehow, or at least put the inconvenient truth out of their minds.

    Once again, this situation is not one that an insurance market can address. It is like trying to drive a nail with feather. Insurance markets are for events that are costly and rare.

    Your pacemaker example is undoubtedly costly, but it is NOT rare. Let me repeat that. It is NOT rare. It is an event with probability 1. A certainty. A fact. A truth. Beyond all doubt. You cannot expect insurance to work in that case just as you can’t expect a match to work underwater.

    Ideally, we’d like people to pay for expenses that they incur. I don’t expect you to pay for replacing the breaks on my car. However, there are cases like your example. In those cases there needs to be a mechanism to deal with it. Insurance is NOT it. Those who favor things universal coverage should at least have the intellecutal honesty to say, “We are going to take your money–in effect part of your life–so that this person over here can get what he needs.” To say we can get it without imposing additional costs on others is just a blatant lie.

    I’d also argue that it shouldn’t be something that covers everything. If a family can’t afford to take a child to the doctor for routine check ups and minor ailments–e.g. ear infections–then perhaps that family should not be having children. To the extent that we reduce the costs of having children for those you can’t afford to have children the more of these children we’ll get. That is what subsidies do, they get you more of whatever you are subsidizing.

  25. Brian Knapp says:

    Since the free market folk don’t really have a solution for him, they must write him off somehow, or at least put the inconvenient truth out of their minds.

    Exactly. The free market failed, or there was never a free market for health care to begin with, or maybe you can never profit when trying to save lives and we shouldn’t expect to. Maybe that’s what makes government the appropriate champion for health care. I don’t know.

  26. Steve Verdon says:

    Exactly. The free market failed, or there was never a free market for health care to begin with, or maybe you can never profit when trying to save lives and we shouldn’t expect to. Maybe that’s what makes government the appropriate champion for health care. I don’t know.

    The market didn’t fail it did precisely what it was supposed to do. You can’t expect a Chihuahua to win in a fight gainst an American Pit Bull Terrier and you can’t expect insurance markets to work with pre-existing conditions. Such expectations are unreasonable.

    Further, it is inappropriate for the government to be stepping in to health care 100% when a much smaller presence can get the job done. You don’t drive a 1 inch penny nail with a jack hammer. Further, doing so could be very problematic from a fiscal stand point. We introduced Medicare and a few decades later we have rapid growth in health care costs. Research indicates there is a link. Expanding Medicare to cover everyone would likely exacerbate the problem.

    We are going to have to make do with less. Lower growth in health care services, lower rates of technological improvement and innovation, lower rates for introduction of new drugs, etc. We can’t maintain the current pace.

  27. Drew says:

    Two points:

    1) Janis: sow. LOL. Point taken. Sorry. But I do shave every day.

    2) Pre-existing conditions: Hi, I’m Drew. I want to enter into a risk pool contract with you. I expect to pay $100,000 in premiums over the next 8 years. Oh, by the way, I also expect, based on my pre-existing condition, to require $150,000 of payments.

    Want to insure me?? Who wants a piece of that??????

    Wake TFU people.

  28. Brian Knapp says:

    We are going to have to make do with less.

    I just don’t see how this is an acceptable solution.

    We can’t maintain the current pace.

    You’re undisputably correct here. Given projections in health costs to both government and employers, I can’t disagree on this point.

  29. Alex Knapp says:

    You can’t expect a Chihuahua to win in a fight gainst an American Pit Bull Terrier and you can’t expect insurance markets to work with pre-existing conditions. Such expectations are unreasonable.

    And so a free market system will leave people to die who otherwise would not have?