The Hidden Costs of
the Health Insurance Crisis

I'd like to begin our discussion by quoting a press release from the HR Policy Association which, two weeks ago, announced that it would work with more than 50 Fortune 500 companies to provide roughly four million uninsured Americans with affordable health insurance coverage:

"Alarmed by the 43.6 million Americans without health care protection, the drain on worker productivity, the ballooning costs of company health benefits, and the widespread inefficiencies in the U.S. health care system, these major employers have formed two large coalitions to marshal their buying power to address these problems."

Perhaps, because it is an election year, much of the press coverage on health insurance costs and the plight of the uninsured has focused on the social or political implications of this crisis. Yet, as the effort cited above would suggest, the condition of this system has a tremendous effect on the private sector, as well.

In your estimate and in specific terms, what are the most significant economic consequences of our health insurance troubles?

There are several important consequences of our health insurance problems:

1. 43 million people are uninsured and most do not receive the same quantity or quality of care as those who are insured.

2. The cost of private health insurance is making it increasingly difficult for workers to afford coverage. We are seeing fewer employers offer coverage and fewer workers being able to purchase coverage that is subsidized by their employers. Furthermore, to keep premium increases even at the 15% annual level, patient cost sharing requirements are rising quickly, making care even less affordable.

3. The impact on the competitiveness of U.S. firms is probably overstated, however. It may be true that it costs Ford $1,000 per car to provide health insurance. Most if not all of these costs, however, are borne by workers through lower salaries. The bigger problem is for firms that employ large numbers of minimum wage workers. They can't lower wages if health insurance costs increase, so they are unable to afford to hire as many low-income workers. Of course, many of these firms don't offer health insurance coverage in the first place.

Tom Rice has it right about incidence of the cost of health insurance falling on workers. This occurs in part because of the (in)elasticity of labor supply and also because health insurance is a valued benefit (that substitutes for cash). However, it is impossible to convince anyone but economists that employers don't pay for health insurance on a dollar-for-dollar basis, hence you get the $1000 per car stories.

I have long suspected that there is more at work here than just inability to convey economic concepts. Personnel (now HR) executives have long been low in status within large firms (as compared with executives in finance, marketing, etc.). However, running large and expensive benefit programs adds to status. The personnel field has much at stake in the idea that every dollar of health insurance is one dollar subtracted from profits.

It is also correct that for low wage workers, where the minimum wage is a floor, benefit incidence may be limited. Calif. has a higher minimum wage than the federal. The state minimum is $6.75 and there are moves in the legislature to push it up by another $1. So if you start adding even a basic health plan on top of $6.75-$7.75 -- maybe another $2/hour for a full time worker -- you will begin to pinch low wage jobs and low wage employers.

But there is an element here -- maybe where liberals and conservatives can come together -- albeit in a not-so-politically correct fashion. Calif. liberals generally favor pushing up state "labor standards", not just health insurance as mandated by SB 2, but minimum wage, safety, level of resources going into standards enforcement, etc. The business community then complains that jobs will be lost due to rising labor costs. Conservatives, however, are anxious to cut back on immigration -- a sensitive Calif. issue. If labor costs were pushed up by mandates for health insurance, etc., it is most likely that job opportunities at the low end of the labor market would be reduced. And the result would be, presumably, less immigration into Calif.! Immigrants would go somewhere else, maybe Texas, where labor standards were lower. Hence, the opportunity for a liberal-conservative alliance, at least in Calif.

A final historical footnote. In 1945, then-Gov. Earl Warren proposed a universal single payer plan for Calif. funded by a payroll tax. The chief opposition at the time was the Calif. Medical Assn., which would now love to have such a plan. After CMA killed the first plan in the legislature, Warren submitted a cutdown catastrophic-type single payer plan which CMA also derailed. Two years later in 1947, after being re-elected by a landslide on both the Republican and Democratic tickets, Warren came back with a pay or play plan -- which CMA also killed.

Had any of these plans been adopted in the mid 1940s, in one way or another the cost of health insurance would have long been embedded in labor costs and we would be having a different sort of debate. We would still be talking about cost containment -- as every country in the world does. But we would not be talking about counties going bankrupt and hospitals pulling out of the emergency room business because the ER has become the US version of universal health care.

"Alarmed by the 43.6 million Americans without health care protection, the drain on worker productivity, the ballooning costs of company health benefits, and the widespread inefficiencies in the U.S. health care system, these major employers have formed two large coalitions to marshal their buying power to address these problems." (http://www.hrpolicy.org/press/2004/release_051004.htm) The preceeding quote contains a number of elements, each of which requires separate comment.

"...43.6 Million americans without health protection..."

That statement is not, strictly speaking, correct. The correct statement is that at a particular moment, 43.6 Million people lacked health insurance coverage. Similar numbers of people lacked health insurance at all periods during 2002, but the particular people in this group were changing. Many, but by no means all, of them had access to health protection, in the sense that they received health care for which they paid or that was rendered without payment. The uninsured as a group consumed less care than did the average insured american and were subject to limitations that in many cases resulted in severe hardship.

"...Drain on worker productivity..."

The evidence that worker productivity was materially affected by the lack of health insurance coverage is hard to cite. The key word is "materially." That lack of insurance would affect productivity seems intuitively plausible. But that is not the primary reason why incomplete health insurance coverage is a problem. Nor would U.S. productivity have differed materially had insurance coverage been universal.

"...Ballooning costs of company health benefits..."

No doubt about it, but also ballooning out-of-pocket payments by insured workers. As Tom Rice correctly observed, the consensus among economists is that, perhaps after a short lag, employer costs fall on workers through retarded wage growth. Cost increases are a problem for workers, far more than they are a problem for companies.

"...Widespread inefficiencies in the U.S. health care system..."

Again, no doubt. But it is important to recognize that the indubitable presence of inefficiency contributes to a needlessly high level of health care spending but has virtually nothing to do with growth of health care spending. There is no reason to think that waste, as a share of health care spending, has grown; quite the contrary, there is some reason to think it has shrunk through the pressures of managed care.

As the effort cited above would suggest, the condition of this system has a tremendous effect on the private sector, as well.

The fact that companies have banded together to try to control health care spending growth and to improve health care quality -- and they should be applauded for these efforts -- does not mean that rising health care costs have a material effect on the private non-health care economy. The dominant fact is that health care is one of the most rapidly growing private industries; that is the primary fact.

In your estimate and in specific terms, what are the most significant economic consequences of our health insurance troubles?

1. Gaps in health insurance coverage mean that many people face financial obstacles to care which result in either financial hardship or inferior care. Essentially universal coverage should be a goal of federal policy. This statement does not contradict my answer to the first question, which emphasized the fact that the uninsured get a lot of health care; and, in fact, many who are counted as uninsured have poor coverage and do not have needed "protection."

2. The United States still spends a lot on health care that costs a great deal and generates small benefits. The key to slowing growth of health care spending is a recognition that slowing growth of health care spending will mean denying care that produces small (but not zero) benefits to people who are well insured. We have never done that and there is not yet any widespread acceptance that such health care rationing is or will be either necessary or desirable. Paradoxically, universal coverage may be a necessary precondition for effective control of health care spending.

In the preface to this week's discussion I write:

When the 100,000 strong Communications Workers of America union staged a four day strike last weekend against SBC Communications, the centerpiece of its demands was not to expand but simply to preserve the status quo for their members' health insurance costs. In fact, for SBC, honoring this demand will require increased spending as the company's insurance premiums have risen at an average of 14% since 2000.

(As an aside, these remarks also cite the number of uninsured at somewhere between 21 and 40 million.)

I raise the example of the SBC/CWA negotiations in light of Dr. Aaron's statement that "rising health care costs have [no] material effect on the private non-health care economy." Given the responses by Professors Rice and Mitchell on wages and profits, I wonder if we might come at this issue from another direction.

Here's a quote from today's New York Times:

Bruce E. Bradley, director of health care strategy and public policy at General Motors , said that "the increase in health care costs continues to be a very serious problem, especially for companies competing in the global marketplace."

Now, perhaps Mr. Bradley is affirming Prof. Mitchell's statements about the personnel field. But, perhaps, there is something to his claim.

Surely America's corporations, which are likely the largest purchasers of health care insurance in the U.S., have a vested interest in reducing the cost of this service?

In the face of rising health insurance costs, is it unreasonable to believe that for-profit companies will need to offset the difference -- either by reducing their benefits, tinkering with wages or, perhaps, pushing for reductions in the cost of purchasing health insurance for their employees?

Finally, isn't it likely that any significant change to our current arrangement will require the support of . i.e., directly benefit . the private sector?

Every corporation has a vested interest in doing whatever it does efficiently. Improved efficiency is bound to benefit somebody: stockholders, workers, and/or consumers. Even more so, if one firm in an industry could reduce its health care cost relative to its competitors and yet provide the same quality of health care insurance, that firm would clearly have a competitive advantage. So it is rational for firms to try and be more efficient. That is a different question, however, from whether U.S. firms collectively are at a competitive disadvantage in world markets because they provide health insurance.

The focus on competitiveness I think leads to the wrong questions and to a single-minded emphasis on cutting costs. That can lead to suboptimal "quality" of what health plans provide or just non-provision of health insurance. The right basic question about employer provided health insurance is why every employer -- regardless of what they produce -- should also be assumed to have some special expertise in running a health plan. Microsoft presumably has an advantage in designing and marketing software.

Why should it be assumed that Microsoft will also be good at administering health insurance? The fact is that it is an historical accident that we rely on employers to provide health insurance. (If we really think that employers are especially adept at insurance provision, why don't we also give them tax incentives to provide, say, auto insurance or house insurance?) Once you ask the right question, the debate then moves to who should or could provide health insurance.

The conservative answer is that individuals should do it, maybe through some sort of individual accounts. The liberal answer is some version of a single-payer plan. Once that is on the table, we can then ask which of the three basic approaches -- employer, individual, or single payer -- will provide a universal plan of some basic quality level at a reasonable cost relative to GDP. Discussion of competitiveness in world markets will not get us to that choice.

Fact is that the annual gyrations in the dollar exchange rate relative to other currencies do more to raise or lower competitiveness than any fiddling with health insurance could ever do.

Sharply rising health costs over the past few years have coincided with a drop in the proportion of value added represented by labor compensation (which includes employer financed health insurance costs).

Although these trends cover only a few years and many other things are going on, they are hard to reconcile with the proposition that rising employer financed health costs are a burden on businesses.

They are instead a burden on workers -- partly through retarded growth of money wages, partly through pressure on other fringe benefits, and partly through increased employee premiums, cost sharing, and narrowed coverage. My statement that health insurance costs have no material effect on the private economy meant on private businesses. Rising costs have to affect someone.

The bulk of the empirical evidence and economic theory suggests that the "someone" is workers. None of this should be interpreted to mean that a jump in health costs does not create vexatious transitional problems for businesses who are directly responsible for the bulk of their employees' insurance costs... it does create such problems.

What it means is that businesses for the most part care principally about the total cost of hiring a worker and are more or less indifferent about what form these costs take. If one cost rises unexpectedly, businesses will find a way, over time, of adjusting other costs so that they pay, in total, about what workers' added production is worth to them.

Would businesses prefer to avoid such unexpected cost increases? Of course. Dealing with them is time consuming, diverts attention from the business's primary activity which is not providing health insurance and can be a cause of labor unrest. Hence, the annoyance of managers with sharply rising health costs.

From: Prof. Tom Rice I completely agree with Dr. Aaron's response: the overriding burden of increased health care costs is on the worker, not the firm.

All of the reactions available to employers in the original question are being done already: "reducing benefits, tinkering with wages, pushing for reductions in the cost of purchasing health insurance for their employees." And indeed, all of these hurt the worker.

But the other part of the question concerned the impact on companies that operate in a global marketplace. In considering this question, it should be kept in mind that many imported products have a large U.S. value added (e.g., Toyotas being produced in Kentucky). Even ignoring this, I would have to agree again with what is implied by Dr. Aaron's answer, that the burden would be felt mainly by U.S. workers.

To the extent that health care costs raise overall marginal costs of production within a global market, U.S. firms will produce less, meaning that they will hire fewer people and pay them a little less. There is no necessary reason to believe that these firms' overall profits will be lower.