In his “Are Employers to Blame for Our High Medical Prices?,” David Dranove takes issue with my statement in a New York Times blog post:
“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.”
“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.”
So far I can buy the nuance. It is something we could theorize about.
But then David he notes that:
“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 was 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.”
Forgive me if by now I am lost. Do we really believe that modern corporations, whose management and board of directors agonize even over an extra penny of earnings per share (EPS) – believe me, I know whereof I speak – simply outsource the procurement of major inputs and then look the other way?
They do seem to do it in health care – which is the puzzle – but they surely do not in connection with other important inputs where smart buying can add pennies to EPS.
Supply-chain management is by now a science – globally – and part of supply-side management is the “make-or-outsource” decision, which is constantly being reevaluated by corporations, with keen insight into the prices of the raw materials going into the production of parts – e.g., batteries or car doors or tires.
My problem and, I believe, Alain Enthoven’s as well, is that corporations have been passive buyers of health insurance for too long and, with it, passive payers for health care. If premiums go down, employers are happy and may even pat themselves on the back. If rates go up – as they did dramatically in the late 1990s and early noughties –employers whine, blame someone else – hospitals, doctors, and, almost always, government — but then just pay.
David then notes:
“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.)”
Just shifting more of their employee’s health spending out of the insurance contract into out-of-pocket spending by employees may constrain employment-based premiums; but whether it will constrain health care prices and total health spending is quite another matter, especially when a common lament among employees with high deductibleshas been that they have so little comparative price information.
So, while I appreciate David’s comment and will take it under advisement for further thought on the issue, I remain disillusioned with employment-based health insurance whose passivity has weakened the demand side in health care in determining prices. It is one thing to “worry” about health care costs. I have been at hundreds of conferences at which employers have done that. It is another thing “to do something” about it, and passivity is not it.
I concur with the conclusions reached by Alain Enthoven and Victor Fuchs in the “Employment-Based Health Insurance: Past, Present, and Future“:
“We highlight employment-based insurance’s flaws: high administrative costs, inequitable sharing of costs, inability to cover large segments of the population, contribution to labor-management strife, and the inability of employers to act collectively to make health care more cost-effective.”
It would be great if some day we could get rid of it.
Uwe Reinhardt is recognized as one of the ation’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.