Yes. Employers Really Are to Blame For Our High Medical Prices

Yes. Employers Really Are to Blame For Our High Medical Prices


I welcome Leah Binder’s earlier post on this blog, written in  response to my blog post in The New York Times. To be thus acknowledged is an honor.

As an economist, I am not trained to respond to Ms. Binder’s deep insights into my psyche, dubious though it may be. Nor, alas, can I delve into hers, fascinating though that might be. Let me therefore concentrate instead just on substance.

First of all, I do not recall calling employers “stupid,” nor did I question their IQ. I do confess to having once called employee benefits managers, when addressing them at some of their usually mournful meetings, “kind-hearted social workers dressed to look like tough Republicans.” At that meeting I contrasted how carefully their company’s tough-minded VP for Procurement, Murgatroid de B. Coverly III, Princeton ’74, purchased paper clips for the company with the much more mellow approach taken by their V.P. of Human Resources to purchase health care for their company’s employees.

Benefit managers – I hate to call them BMs — really are the nicest folks. They care deeply about their employees’ well being (until, of course, the latter lose their job with the company). They worry incessantly about their company’s ever rising outlays for health insurance. And, after a cocktail or two, they regularly lament how rarely they get the attention of top management and of the board of directors – the very folks I once told to go look into a mirror in their search for the culprit behind rising health care costs.

No, when I say “employers” I really mean top management and boards of directors who make the rules. And  I did not even call those mighty ones stupid, but merely “passive payers” as did, by the way, David Dranove on this blog in his critical response to my New York Times piece. Why these usually tough and smart people have behaved so passively in buying health care for themselves and their employees remains a puzzle at the level of economic theory.

As none other than the distinguished Alain Enthoven put it as early as 2003, and later with Victor Fuchs in“Employment-Based Health Insurance is Failing Society“.

I concur. Indeed, if I really had the titantic power over U.S. health power Ms. Binder imputes to me and my academic colleagues, I kindly would have relieved employers long ago of their nettlesome burden of worrying over health-care costs. I would rather just have them concentrate on making the best widgets in the world and sell them to China.

Furthermore, I would grant Americans truly portable health insurance that is not lost with a job at a particular company and I would have afforded Americans price transparency in the market for health care.

Many academic economists have that same dream – perhaps most – but for more years than I wish to remember we have been howling into the wind with these ideas – even with the more modest idea of eliminating the regressive tax-preference now accorded employer-paid health insurance, a dream David Dranove seems to have as well.

I do stand properly accused, however, of accusing employers being party – passive or active, I care not which — to a deal to keep prices for health care in the private sector opaque from the public. Well, haven’t they? After all, they had half a century to flush these prices out into the open. Indeed, I recall that one of the major complaints among employees with high-deductible policies has been the lack of information on prices by provider and procedure.

Ms. Binder assures us that employers have “fought tooth and nail” to get more transparency on prices for employees. I wish Ms. Binder had explained to us their lack of success in this regard so far. Aren’t insurers the hired agents of employers, and should not these agents do as their principals tell them to do? How can principals fighting tooth and nails for something they want from their agents lose that battle?

Finally, I have nothing at all against The Leapfrog Group, being a friend of several of its founders. They, and especially their CEO Binder, are fine, hard-working people truly devoted to improving the cost-effectiveness of U.S. health care, with some successes.

But The Leapfrog Group brings to mind a pictorial model I used during the late 1990s to sum up my impression of the U.S. health system. At that time employment-based health-insurance premiums started once again to rise at double-digit rates. The picture is of a giant elephant lumbering down a jungle path, carrying the U.S. President on one of its tusks, and with people on the ground busily beating the legs of the beast with chop sticks, hoping thus to shove the beast into a more desired directions.

The Leapfrog Group is among the chop-stick wielders called “employers.”

A more current image of the Leap Frog Group in my head is that of a band of U.S. Special Forces doing valiant stuff in the wild mountains somewhere in Afghanistan. Great combat victories in tiny areas, but overall – you get the picture.

Michael Millenson’s, no stranger to this blog, apparently agrees with that imagery.

Uwe Reinhardt is recognized as one of the nation’s leading authorities on health care economics and the James Madison Professor of Political Economy at Princeton University. He is a regular contributor to The New York Times Economix Blog.

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43 Comments on "Yes. Employers Really Are to Blame For Our High Medical Prices"

Mar 22, 2014

In a thirty year career in healthcare, I have witnessed the continuum of engaged to unengaged purchasers. Sadly, generalists are often tasked with making key decisions and there are unaligned incentives to truly act as informed purchasers.

It should also be noted that many employers rely on brokers and consultants and unfortunately, the brokerage and consulting business is as variable as the unit cost pricing of a NY MRI. I have served as a consultant, CEO of health plan and part of a management team that spent over $30M a year of healthcare.

While expense management and travel procurement was driving management to force employees to take connecting flights planes to save $200 in airfare, employees and their dependents were and remain routinely flying “first class” choosing to get ambulatory and elective services through the most expensive providers — often through open access PPO plans that reimbursed MRIs/CAT Scans and CT scans at prices that varied by as much as 500%. HR has historically sought to reduce the “noise” in healthcare instead of reducing the per employee per year costs as a percentage of per capita operating profit.

Most HR and Benefits professionals are not remotely rewarded or penalized for their efforts to control the cost of healthcare. Imagine if 50% of an HR or EB Mgr’s annual bonus ( if they receive one ) was tied to achieving a 3% annual trend increase or lower — before relying on cost shifting techniques such as contribution increases or benefit buy-downs ( cuts in coverage ). My guess is generalists would become specialists fast.

I did witness a scene the other day where we found over $1M in RX savings for an employer that is having trouble growing organically and needs to drive expense reductions to achieve operating income expectations. The $1M savings could be achieved by firing their insurer based PBM and switching to a transparent, 100% rebate pass-through Pharmacy manager. “Shockingly” the insurer was not returning all the rebates to the customer and the employer did not understand how RX costs and economics were working in their highly opaque fully insured plan. The CFO seemed ready to move forward with what seemed a no brainer, low disruption idea but HR was perplexed.

“Does this mean we will have to have another card for employees to access RX benefits.”

“Yes” I shared.

“Well, this could be a problem.. I mean, I will get lots of calls and well, people don’t read. It’s a real issue. We’ll need to think about this.”

The CFO dropped his pencil and sighed. “( Name of HR Mgr), we can fire ten people or get a new RX vendor. This seems like pretty simple stuff. What’s more disruptive firing ten people or two cards?”

Sadly, most CFOs are not in the room long enough for this conversation. They look at cost ( hardly a good proxy ) and glance to see if their doctor is still in the PPO network. HR is often left to make complicated calls balancing savings with what they term “disruption” to a workforce that may have gone through a long periods without raises, bonuses etc. It is a tough situation but the spend and complexity requires a level of focus and ownership from senior management, that has not been there.

Professor, you are spot on. Let’s start aligning incentives to drive more informed procurement inside employers. Put half of Finance and HR’s bonus at risk for achieving zero trend and watch how many quickly ditch open access PPOs and start focusing on better unit cost, reduced consumption through better health and holding vendors accountable for services such as medical management and care coordination.

Feb 17, 2014

Over the years, I have meany times read of the problems associated with free markets, but seldom have I read of such a specific failure that is so well understood. It seems to em that the only way this can come about if the executives concerned are essentially resigned to ever escalating costs and have no interest in fighting it. This may be because when costs escalate across the whole country, every employer is affected equally on a per-employee basis and there is therefore no loss of competitive advantage. So maybe the fault isn’t with the employers as suggested – but with the shareholders who should be looking for superior returns and driving their appointed directors to reduce these costs. Just a thought…

Jul 4, 2013

Well, I only deal in facts (and I’m glad you agree with them) but if I insulted somebody I clearly need to apologize, so please tell me who I wrongly insulted (and hopefully this will be a longer list than the number of things you said I was wrong about, n=0) and I will certainly apologize to them, publicly.

Amanda Goltz
Jul 3, 2013

Indeed, readers of your comments are *very* aware that your books are bestsellers.

I don’t disagree at all that using current tools for calculating ROIs, some wellness and CM/DM programs fall short of the mark. The Rand study is most notable for demonstrating how limited our measurement tools for wellness programs really are. And I agree completely that purchasers of such programs should demand evidence-based proof of return before their investment. And I’m working to build the data collection system to build a realistic dashboard that employers and others could use to evaluate whether such programs make sense for their population, across a range of possible outcomes (not just lower medical costs, but functional outcomes, productivity, acquisition and retention of talent, team effects, employee satisfaction, disability claims, presenteeism, behavioral and social functioning, and others things that cost employers real dollars.)

Where we disagree is really in method. I don’t use insults, off-topic posting, and self-aggrandizement when I work to identify and eliminate the waste while refining and strengthening the effectiveness of those strategies which show early potential. I just… do the work.

How powerful it could be if we stopped fighting over the limited data set we have now, and worked together to design an evidence-based study of how wellness programs influence a variety of measures of value, not simply dollars saved in medical cost. But that probably wouldn’t sell as many books.

Finally, no thanks on your “course” in something called “Critcal Outcomes” (does the typo come free with purchase of course?)

Jul 3, 2013

My apologies for my hysterical off-topic screeching, Ms. Goltz! Please tell me exactly the math mistakes I made in any posting here or in my essays in the Wall Street Journal, Health Affairs, Harvard Business Review, NPR or in either of my trade-bestselling books, and I will happily retract them.

And please, you or anyone else, give me the name of one wellness vendor — just one — that is showing savings without making up numbers (like all the ones those aforementioned articles) or comparing active willing motivated participants to unmotivated non-participants, and while you at it please explain why RAND found essentially the same thing we did.

I might recommend taking my course and certification test in Critcal Outcomes Report Analysis — you can learn how to measure outcomes and that will relieve your Jewish mother anxiety.

Amanda Goltz
Jul 3, 2013

This is a rich and mostly well-reasoned discussion from which I learned a lot, and I thank Dr. Reinhardt, Ms. Binder, fearless leader Matthew, and most commenters.

Two key nuggets which escaped commentary but are profound:
1) that Dr. Reinhardt is not targeting the well-meaning but disempowered HR managers but rather corporate leadership who stand by while operating profit is consumed by healthcare costs and do nothing;
2) Matthew’s excellent observation about how those same corporate leaders may be getting the big picture right after all, as the share of revenue going to employee costs has held steady. That is the most plausible explanation I have heard about why there is not an uproar from the C-suite over the double digit increases in healthcare benefits.

I might add another explanation, which is that members of the C-suite are about 5-10 years from retirement. Too short to make a real difference in the labyrinth of cross-incentives that is the private healthcare system; but long enough to stay the course and leave the problem to the next generation (sucks to be us, fellow Gen X-ers.)

One other note: as I read the comments, the Jewish mother in me was becoming anxious due to the notable lack of hysterical, off-topic screeching about the dark evil that is corporate wellness from Al Lewis and Vic Khanna on every single post on this blog now. But then midway downthread, Mr. Lewis chimed in with the usual. So glad you are in good health, Mr. Lewis!

Phil Christianson
Jun 30, 2013

I agree with Uwe. We were on the Board of Editors for the Journal of Medical Benefits in the 1990s. I was a benefits manager for 14 years at Fortune 500 companies. I was proud of what we accomplished, but in terms of making an impact on anything other than our own employee and dependent populations, generally one year cost reductions through better contracts with providers and health plans, or plan design changes, it was a frustrating job. These roles will continue to needed less over time as employers realize they can’t have much influence over cost, quality and innovation.

John T (Jack) Garland
Jun 30, 2013

As a retired physician (provider) who for many years paid for insurance coverage for our employees, I have experience “wearing several hats.” I think there is ample evidence that a single-payer system offers the most efficient way to provide health care for EVERYONE.

An improved MEDICARE for ALL would remove most of the 30% [$400 BILLION] that is now spent paying people to do things that do not contribute directly to medical care, but serve only to serve the interests of the investors and workers in bloated medical insurance industry.

After that, we can carefully investigate which adjustments will best promote competition among providers (instead of among insurers) to favor gradual increases in efficiency while providing all needed medical care. Remember each of those not well covered now (including increasing numbers of inadequately insured, along with uninsured) is only one serious illness from bankruptcy. JTG 30 JUN 2013

Uwe Reinhardt
Jun 30, 2013

Yes, that is the problem, MG. I don’t at all argue that either employee benefit managers or CEOs are stupid, incompetent or not hard working at what they do, nor even that over the years they have not tried to flail at the health-care supply side with this or that local innovation.

My point over the years has been that employers are just not well suited to be the sponsors and managers of the health insurance of Americans, in good part for the reason you note, MG.

It has been remarked on this blog that there are reasons why “CEOs have been unable to keep the costs of care from increasing, not least of which is that health care isn’t their business.” Yes, precisely! And because it is not their business, perhaps it might have been better for America had they stayed out of that business.

As an economist, I would prefer to see our business firms concentrate on their core business and compete across the globe with their products, leaving the business of providing social insurance — pensions as well — to institutions better suited to these tasks. I doubt that many of my colleagues would find that a rash proposition.

I believe that the employment based system has contributed substantially to the fragmentation of the payment side of U.S. health care, as you suggest MG, and in addition it has given Americans ephemeral insurance coverage that is lost with the loss of a job in a particular company and thus creates inefficient job lock to boot.

Unfortunately, the system is a bit like a chronic disease that cannot gotten rid of but can at most be controlled. Given that we are stuck with it, it is wonderful to learn that it finally, at long last, has begun to bestir itself to develop the innovations that might control the future growth of health spending better than the system has been able to do in the past half century. There is always hope.

There is one more facet to the employment based system that warrants mention. How successfully it can be in reining in the growth of health spending on employees can be strongly influenced by the tightness or looseness of the labor market. We saw it in the boom years of the 1990s when employees rebelled against the strictures of managed care and employers quickly caved in to broaden provider networks to the point that it was more or less business as usual again. Double-digit premium growth in the late 1990s and early 2000s were the footprints of that retreat.

There is a debate on how tight labor markets in the US might get as the ratio of working age Americans to older Americans descends towards close to 2 by the 2030s. Some labor economists reading this blog might chime in on it.

Jun 30, 2013

I always thought it came down to the simple fact that even if a group of large, self-insured employers really wanted to really change something they simply didn’t have enough the enrollment numbers (employees & dependents and retirees) over a broader geographic area (e.g, MSA) to grab providers attention by effecting their pocketbook.

Jun 30, 2013

I haven’t figured it out yet, but why in the hell would an employer want the additional expense of providing healthcare to employees? I’d think that all (smart) employers would prefer a single-payer system like Canada’s, at 10% of GDP, rather than ours at 18% of GDP. But what the hell do I know? I only owned a company for 25 years.


In my latest blog ( I remind all that those who can’t do, teach, and these entries prove the point. Uwe, I’d like to see you spend a quarter in the shoes of one of these Benefits Managers that you belittle. Your comments are the typical snot-nosed comments of all academics who scorn the working class, and yet you’d likely be incapable of performing their jobs.
There are many reasons why CEOs have been unable to keep the costs of care from increasing, not least of which is that health care isn’t their business, and so they have delegated the management to those they source aggressively: the health plans. So I find it amusing and disingenuous that you don’t point the finger to those whose job it has been and is to manage health care….health plans….and ask yourself why they have been seemingly incapable of controlling health care costs.
Like in most areas of sourcing, companies don’t buy all the components needed to produce a service, they often use intermediaries. That’s what’s happened in American health care. And the font of knowledge you cite, Alain Enthoven, was the prophet of that “managed competition” model. A model that failed.
Truth be told, instead of academic BS from the do-nothing crowd, employers have been responsible for most of the innovations in health care payment, quality performance, and benefit design. Not the feds, not the politicians, and certainly not the academics.
From HEDIS (healthcare EMPLOYER data and information set — only recently has the terms employer been replaced with effectiveness), to P4P, to bundled payments, and including Leapfrog, employers have paved the way for reform while the hand-wringing crowd has stood by worried about unintended consequences.
And today we are living through the newest revolution set forth, again, by employers — forcing through transparency, sourcing the market directly, reference pricing services, and turning passive employees into active consumers. It might have taken a while, but it’s not as if any of the Ivory Tower snipers had any better ides — apart from nationalizing health care (which many other nations are actually trying to move away from!!!).
So please, do us all a favor and stop interrupting those of us who are actually bringing about needed change, and keep on teaching while we keep on doing.

Jun 30, 2013

Your comment does not address the employers’ many self-inflicted wounds, like forcing their employees to submit to annual screens for the purpose of overdiagnosing and overtreating them because their half-witted benefits consultants can’t bill the time it takes to read the medical literature that says Americans are already overscreened and overdiagnosed.


I’m not sure that has anything to do with Uwe’s attack on employer-sponsored health care, Al. Even if healthcare were completely nationalized, it’s highly likely that employers would engage in those processes with a goal of showing employees that they care about their health. Second, I don’t think (but correct me if I’m wrong) that there are any studies showing that overscreening of Americans is caused by overzealous employers. So apart from that one, what other “self-inflicted wounds” can you come up with?

Jun 30, 2013

I was responding to your observation that these people are doing their jobs and creating innovations in benefit design and producing needed change. Wellness programs are precisely the opposite — unneeded change.

You don’t need a “study” to identify overscreening and overdiagnosis due to these wellness programs. You simply need to read the results. These people are so innumerate and unqualified that they invalidate themselves right in their own reports. I named three in my Wall Street Journal op-ed last week and my website has 25 more.

Saying “apart from this one” is like “Aside from that how did you enjoy the theater, Mrs. LIncoln?” Including all the incentives and overdiagnosis (which they don’t becasue it’s a different cost center), these programs equate to almost 10% of healthcare spending.

As for things other than wellness, I have many chapters’ worth in my new book Cracking Health Costs

Employers’ biggest mistake is not realizing that their benefits consultants are simply not capable of analysis and de facto outsourcing all major decisions to them.

Jun 30, 2013

>>> “So it’s not really the employers’ fault or the patients’ fault or the providers’ fault. It’s America’s fault.”

No, it’s not America, a piece of dirt’s fault, it’s America’s leaders. Political corruption. *IF* we were smart we’d have a system where, if you get sick, you get care and the caregiver get’s paid. But it’s not that simple when profits are at stake, and politicians can get a piece of the action. We have scum at the top, called democrats and republicans, and it may take an armed and bloody rebellion to change it, but that’s our direction.

And then the Fat Cats will move off shore, where their only worry will be pirates and a corrupt security force.

Life is sweet, isn’t it?

Jun 30, 2013

Gotta love the accruing exasperated cynicism here. Warranted, I suppose. All part of a larger theme, that of rampant criminogenic corporatism.

Jul 2, 2013

“All part of a larger theme, that of rampant criminogenic corporatism.”

Historically documented by Hedrick Smith in, “Who Stole the American Dream”.

Dennis Byron
Jun 30, 2013

This is an interesting stream of academician navel-gazing, both in the posts and throughout the comments, but when you peel the onion and go back to the author’s original New York Times article, you find the author’s real conclusion (and possibly his fundamental first principle for all his other opinions and conclusions stated here and elsewhere). The author concludes the finding that employers are to blame for high health care costs by stating:

“(the likely long term outlook in his opinion) would entail ever more pronounced rationing of quality, real or imagined, by income class. But such tiering has long been the American way in other important human services – notably justice and education. Why would health care remain the exception?”

So it’s not really the employers’ fault or the patients’ fault or the providers’ fault. It’s America’s fault.

Unlike England, Germany, Canada and all the other countries cited throughout these three posts and dozens of comments (where health care is better and less expensive and more transparent and…), the U.S.’s highly structured capitalistic caste system sentences low-income Americans to a life of sick, unjust ignorance. That’s why millions of lower income people from around the world are risking death and leaving their families forever to illegaly enter England, Germany, Canada and all the other countries cited throughout the three posts and dozens of comments as the places to be. In fact, I’m told that for some bizarre reason even people from England, Germany, and Canada want to come to this terrible place America.

Jun 30, 2013

It’s all about the models and whether one is an insurance company, an HMO, a drug company, etc. they all use models for profit. Each sector wants a profit of course so how all this comes together today with raging algorithms is frustrating everyone.

There’s not one entity to blame as it’s a lot of things. Sure insurers have keep the employer insurance going as it’s in their business model for profits. As far as economists, well I agree with the Quants that economists don’t have laws and they just guess as today’s technologies and instability has removed a lot of what they referred on with the past.. Some economists should spend more time with the quants as they are probably using some of the tools quants and data scientists created anyway.

Some of those models lie too. Models and their accountability is going to become a big issue when banks, insurers and others are finally going to be held accountable for their math and code. Right now it’s the wild west and I do laugh at the studies that come out saying we will save “trillions” as we only spend a couple trillion a year in the US, a big number but put that in context with the garbage you read about saving “trillions”:) It’s a farce to sell you something.

I have had some chats with an incognito banker and we both agree that banks and insurance companies pretty much are not more than software companies that control and move a lot of money and half of the analytics sold in the upcoming future are going to be a waste of investment. Sure there’s good stuff out there too but the Algo Dupers as I call them are well and alive. Data platforms are supposed to make it better and easier and they do in a lot of instances but we have a ton of 3rd party folks that use it to make money with layer after layer, and then we have “complexities’ that nobody can work with:) It’s not the data, it’s the models. All this makes the premium price go up too when you think about it.

Best video ever made that explains this to the layman and what a quant really does (and insurers have tons of them) is the documentary called Quants the Alchemists of Wall Street. It’s done so the layman can get a grip on how this works and the lack of accuracy and care for the end results affecting consumers.

So take the employers and their mathematical business models and ask questions I say and you end up finding CEOs of banks, like Jamie Dimon that can’t give you a clue about their models. It’s every bit about clashng models and people getting duped with studies and numbers that may not be true or in context but make a case for adding more to the profit chain.

What’s worse too is trying to see where your bottom line dollars go and to what corporate giant you may be feeding as SEC rules allow for tiered subsidiaries and you can’t see all the corporate subs. Pretty scary and the way they say off the map. Investors get screwed with this as well. That’s kind of how a Untied Healthcare sub slipped in with the Federal data hub business. Two weeks after the HHS award, United buys QSSI, and didn’t have to report it to the SEC due to rules that stated a subsidiary needs to have “substantial operations”. I thought the hub was pretty substantial and QSSI a few years ago got a $9m dollar grant for work at the DOT.

In short, subsidiaries is where the action is taking place for a lot of this today and they carve out areas to profit this way. You don’t see United participating in exchanges, they want the government and employer business. They have a subsidiary that focuses on Tri-Care and getting more business from them, not to mention they sued DOD to get the contract so some very powerful players here that keep driving up the cost in getting folks to buy more Health IT and on the other hand getting contracts to pay MDs as little as they can. Not too long ago there were a few states to where they were paying less than Medicare and the AAFP was taking them on. The Supreme court though recently was kind to doctors and now allows them to collaborate and work together to litigate with insurers too, instead of the big conglomerate against one doctor at a time, and we know how those cards get stacked.

Much of the high cost of healthcare is flat out modeled that way and until we call folks on the carpet for their math models and subsequent algorithms that make like impacting decisions running on servers 24/7, we not getting anywhere very fast.

Jul 2, 2013

Thanks for the links MedQuack, I watched both. We are being manipulated by the 1% because it’s easier to steal money than earn it.

Jun 29, 2013


Yes, all of what you say is very interesting and disturbing, but I was referencing third party payer in my comment where the employer buys insurance for the employee. The real payer ultimately is the individual, but with so many intermediaries the real payer is mostly uninvolved.

I would be less concerned about the variation in charges and more concerned about how the premium or service is paid for. You mention colonoscopy and I understand Medicare pays hospitals twice as much for their facility charges as they do to outpatient surgical clinics. That is a big dollar difference. Do you think a patient paying cash would choose the hospital over the outpatient clinic? Do you think a patient paying cash would pay the gastroenterologist so much more if the next town over they could get it less expensively?

Patient payment brings the prices down and makes them more level except for the hotshots that appeal to those that have no concern about price. Same for insurance premiums. Do you think individuals would be paying such high prices or would they shop so they spend thousands less even if they carry a higher deductible (mostly paid for by the premium saved on the rare occasions the deductible has to be met)?

Third party payer along with overregulation and inefficient regulation are the culprits, not variation in prices.