Are Employers to Blame For Our High Medical Prices?

Are Employers to Blame For Our High Medical Prices?

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In a recent New York Times blog, Uwe Reinhardt places much of the blame for high and rising medical prices on passive employers. He argues that employers should work just as hard to reduce healthcare benefit costs as they work to reduce other input costs. But he then observes:

“One reason for the employers’ passivity in paying health care bills may be that they know, or should know, that the fringe benefits they purchase for their employees ultimately come out of the employees’ total pay package. In a sense, employers behave like pickpockets who take from their employees’ wallets and with the money lifted purchase goodies for their employees.”

I think that Reinhardt gets the economics wrong here and, in the process, he puts too much of the blame on employers. Reinhardt is right in one respect – employees care about their entire wage/benefit packages. If benefits deteriorate, employers will have to increase wages to retain workers. Thus, it seems that if an employer reduces benefit costs, it must increase wages by an equal amount. If that is true, we can understand why employers are passive.

The correct economic argument is a bit more nuanced. Employees do not care about the cost of their benefits; they care about the benefits. If an employer can procure the same benefits at a lower cost, the employer need not increase wages one iota. In this regard, there is nothing special about health benefits. Suppose an employer offers employees the use of company cars. Workers don’t care what the employer paid for the cars, and if the employer can purchase cars at a deep discount, it will pocket the savings.

Reinhardt may be wrong about the underlying economics, but he is correct in the big picture. Employers may have an incentive to reduce benefits costs yet they are passive purchasers. With a few exceptions, nearly every American corporation outsources its healthcare benefits to insurers and ASO providers and then looks the other way as the medical bills pile up. Sure, they complain about the high cost of medical care, but they don’t take direct action by aggressively shopping for lower provider prices. Doesn’t this passivity demonstrate a lack of interest? No more so than the fact that auto makers do not aggressively shop the lowest rubber or silica prices implies that they are disinterested in the costs of tires and windows. Auto makers outsource the production of tires and windows (and most other inputs) and let the Michelins and PPGs of the world worry about rubber and silica prices. By the same token, American companies outsource the production of insurance and let the Blues and Uniteds of the world worry about provider prices. This is entirely appropriate.

Could employers do more to reduce healthcare spending? Employers have dramatically increased deductibles in recent years, and this has had some effect (though no one is certain just how much.) Employers tried forcing employees into narrow network plans in the 1990s, mostly in the form of HMOs, but employees rebelled against the lack of choice. (Some of you may remember the “Patients’ Bill of Rights” that Congress nearly enacted.) I don’t expect too many employers to repeat that mistake. Employers might offer cheaper plans alongside expensive ones, but they probably won’t pass most of the savings on to employees. For one thing, employers want to keep most of the savings for themselves. Perhaps more problematically, there is a growing body of evidence that this could lead to an adverse selection death spiral that would disrupt employee choices.

It is hard to imagine that American businesses have been willfully negligent about healthcare spending. If only by accident, some employers would be worried about health spending. And if worrying about costs was enough to actually lower costs, then those that worried would outperform their competitors and gain market share. By now, every American would be working for a company that worried about health spending. The logic is pretty compelling: America’s firms are worried about health spending and are appropriately outsourcing these worries to insurers.

So why are medical costs and medical prices so high? I could give a list but this has been discussed ad nauseum so I will not repeat it here. Employer-sponsored insurance is on the list, but largely due to tax deductibility. If employers are otherwise on the list, they are towards the bottom.

David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.” This post first appeared at Code Red.

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14 Comments on "Are Employers to Blame For Our High Medical Prices?"


Guest

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Admin
Jun 20, 2013

Employers could have rationally dumped this on the government in 1948 when Harry Truman gave them the chance. But they didnt. Some wish they might have done, but it’s too late now.

Guest
Jun 18, 2013

I see no reason for employers to select insurances. If every person in the country is allowed to have a flexable spending account (tax deductable) employers may contribute to their employees. People should buy insurances on individual basis – just as we buy auto and home insurances. This will make insurances to compete for each of us and will give each of us way more choices of which insurance and plan to buy.

Guest
Jun 18, 2013

I, too, agree with you, David. Employees don’t give a whit about where their benefits came from or how they came to be there. Just that they have benefits. Moreover, employers are focused on achieving their bottom line- making a profit.

Guest
Jun 17, 2013

There are some intrinsic limits to how much any employer can do to reduce health care prices, including:

a. Health care is local.

Employers bought steel from Japan in a heartbeat when the quality was OK and the price was lower.

But employers cannot send their employees to India for a cheap operation.
(At least not yet. We are seeing some outsourcing in health care, but in minute amounts compared to the rest of the economy.)

b. There are no second hand markets in health care.

An employer can buy used cars for his company fleet, and put people into older ‘used’ office buildings.

There are no used drugs or used operations.

c. Most employers are too small to staff their own clinics.

That would be the fastest way to save health care costs. Have the employees see a doctor on-site. There would be some resistance to this of course.

d. Finally, the price of health insurance is not totally due to the prices paid for care. The age of the employees and the generosity of the plan play a huge role too.

An employer policy for GM early retirees is going to be expensive even if the insurer pays very low fees.

Guest
Peter1
Jun 17, 2013

“No more so than the fact that auto makers do not aggressively shop the lowest rubber or silica prices implies that they are disinterested in the costs of tires and windows. Auto makers outsource the production of tires and windows (and most other inputs) and let the Michelins and PPGs of the world worry about rubber and silica prices.”

I think he lost his credibility here. Auto makers carry such massive purchasing power that THEY dictate what they will pay for most inputs. Is Walmart a “passive” employer/purchaser? Why then is health care purchasing beyond their usual purchasing power?

I’m thinking Brent Burton’s insight is closer to reality.

Guest
CerNerd
Jun 17, 2013

“Auto makers outsource the production of tires and windows (and most other inputs) and let the Michelins and PPGs of the world worry about rubber and silica prices.”

Clearly you have not sat through automotive supplier cost reviews where the auto makers examine input and production costs for components and assemblies before negotiating the contract!

I don’t know if we’ll ever get to the level of market efficiency in healthcare where a purchaser could perform such a review with much confidence, though.

Guest
Jun 17, 2013

You cite a couple very specific theories: ” Employers might offer cheaper plans alongside expensive ones, but they probably won’t pass most of the savings on to employees. For one thing, employers want to keep most of the savings for themselves. Perhaps more problematically, there is a growing body of evidence that this could lead to an adverse selection death spiral that would disrupt employee choices.”

Citations, please?

Guest
Jun 17, 2013

I agree with Professor Dranove that the problem is not impassive employers. In fact, I argue that they’ve been not just active, but that their activity on health care is frequently incoherent and wrong. This is largely due to the fact that health care is very far outside the expertise of most employers who, I am sure, would much rather stick to what they know. Hence, they’ve engaged in a decades-long game of zigging and zagging and, in the example of the patients rights movement, they were effectively outflanked by their own employees in cahoots with health care providers. This helped to both break down cost control and enlarge the basket of what’s covered. This single biggest mistake employers have made on medical care benefits in the workplace, however, is easy to point out: it’s their unfounded and nonsensical support of health-contingent workplace wellness programs, which not only rarely improve anyone’s health, they add to the cost burden in the process. We should all get such a deal.

Guest
Al lewis
Jun 17, 2013

Most employers are passive. They rely on brokers and benefits consultants. This turns out to create a moral hazard because they get paid by wellness and other vendors to pitch their servicea

Guest
Brent Burton
Jun 17, 2013

Lower provider pricing? Give me a break. Doctors set prices based on fee schedules determined via Ins payor collusion by region.

Further, payors continue to raise premiums while pushing the burden of payment to the patient. You Rbarking up the wrong Forest.

And finally, how can employers “shop” a market for lower premiums when the 2 payors in that market collude on product pricing?

Guest
Jeff Goldsmith
Jun 17, 2013

If we back off one more dimension, the large employer’s embrace of PPO/POS benefits models conferred the market leverage that hospitals systems are exploiting thru both vertical and horizontal M&A, and about which you have become an expert.

The key word in the 1990’s HMO experiment was: “forced”. Employees were simply slammed into narrow network plans and employers confiscated the savings. Enthoven warned them that the “total replacement” model for HMO’s would blow up in their faces and it did.

What employers are preparing to offer workers through private exchanges: multiple choices with a fixed contribution. Employees will get from employers what the uninsured will get from the public exchanges; free choice based on good information and a meaningful share of the savings. It’s the only way out of the box employers constructed for themselves.

Guest
civisisus
Jun 17, 2013

Jeff, the only problem with your/Entoven’s explanation of the 1990s HMO blowup was that, especially in the case of large employers, the incidence of employers fully replacing FFS plans with HMO coverage was practically nonexistent.

Nice try, though

Guest
Jeff Goldsmith
Jun 18, 2013

I was there. Left out a few steps. Total replacement was a single carrier, so other health plans went away. The HMO was the cheapest, with few or no copays. If you wanted to continue seeing your doctor, and he or she wasn’t in the HMO network, you paid thru the nose via sharply higher copays in the newly formed PPO/POS products. For low income workers, there wasn’t much choice, since they didn’t have the cash to pay the higher copays. Women, in particular, hated having their health plan choices narrowed, and being forced to pay up for continuing to see physicians with whom they had established a strong bond, etc. They led the backlash.