POLICY: Employment-based healthcare, more of the same uneven erosion

There are two ways employers get out of providing health care. They can stop providing it (and plenty of data shows that they are doing just that) and they can also pass more of the cost onto their employees. That also has the impact that at the margin their employees stop purchasing it for their families or themselves. But it has one more impact, which is that the employees’ costs are going up much faster than the employers.

California Healthline had a good summary of a WSJ article and other accounts of a Mercer survey this week showing that pushing more costs onto workers reduces the employers’ costs (or at least reduces the amount of increase in those costs).

According to the survey, employers’ health care costs rose 6.1% in 2005, compared with 7.5% in 2004, 10.1% in 2003 and 14.7% in 2002. The average cost of company health plans increased from $6,679 per employee in 2004 to $7,089 per employee in 2005, the survey found . Employer spending on health coverage would have increased 10% in 2005 without the shift in cost to employees and changes to health plans, according to the survey.

Now there’s nothing revelatory here, other than some continued misunderstanding by economists that this is just moving the deckchairs on the Titanic. It is moving the deck chairs on the Titanic in terms of containing overall health costs–they’re not going to be much affected by who ends up picking up the tab at the margins. But despite the feelings of snooty doctoral students at Harvard and even brilliant health economists at Stanford, there is an impact in the real world from who pays for what.

That’s because it’s not as if employers are rewarding their employees with extra cash to replace essentially lowering their health care benefits (or making them pay higher "premium per benefit"). So those employers who cut benefits more have lower labor costs and therefore make higher profits. Hence the continued difference in the margins of Costco and unionized supermarkets on the one hand and the Wal-Mart on the other.  This leads to those economists who’ve vacated the Ivory Towers and instead taken the lure of the filthy lucre to become analysts on Wall Street to put continued pressure on the "good" companies to end up looking like the Wal-Marts of the world. Which has been playing out in labor disputes across the country and even has affected the hallowed halls of General Motors itself.

And while the end of the employer-based health care system is something I am in favor of, I’m not in favor of it dying by a thousand cuts while nothing is there to replace it.

Coda: The crack at the Harvard doctoral student is an old chestnut here at THCB. However, me taking aim at America’s greatest health economist and my old professor Vic Fuchs is quite another thing. Here’s what he said in his latest Health Affairs article, which (apart from this little dispute is excellent as you’d expect):

Today the largest private employer is Wal-Mart, which despite its size faces intense competition daily from a host of other retail outlets. When they offer health insurance, it must come out of their workers’ wages; for minimum-wage employees, this is not possible, so it often will mean loss of jobs.

While that is true across the economy, it assumes that there are constant margins among firms within one industry. But we know that’s not true. Wal-Mart has much higher margins and higher profits than other retailers. it could easily afford more generous health benefits, and maybe would have them if it was unionized. However, we know that Wal-Mart spends incredible amounts of effort to prevent unions getting a foothold, partly because of the health insurance issue, and overall in order to keep its labor costs lower. Wal-Mart tries to keep all of its costs lower including those of its suppliers, other than one set of "costs" — those that it retains as earnings, some of which it pays to its shareholders. So to say that "It must come out of their wages" only really holds true if you count the dividends that the Walton family (net worth >$100 billion) collects as "wages". You could just pay them (and the other shareholders) lower margins and pay the workers more in health benefits. That’s exactly what Costco does. But that’s the real world not the economists’ theoretical level playing field that Vic Fuchs doesn’t usually get stuck on.

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10 replies »

  1. Employer-based insurance is a 20th Century thing and is just about over, thank God. USA Today’s ThanksGiving Day article on HSAs said that employer-based insurance is losing 3% market share, per year, of workers in companies of 500 or less. I sure hope they are the healthy young workers leaving the sick, old and lethargic. BusinessWeek has an article out today that is really crazy on individual insurance. –Paul Z. Pilzer again– Notice how they say a Nebraska employer is paying part of the employees’ premium — that’s illegal, trust me.

  2. Uh, maybe I’m just spoiled, Eric, but every company I’ve ever worked for has reported the value of my health benefits. In Michigan, I’d get a statement in the mail at the end of the year that said what the company paid for my insurance, and the portion I paid in. Then when I moved to Tennessee last year, I got a table of options at open enrollment time that itemized my cost, the company’s share and the total for each of our health benefit choices, as well as the add-ons like dental, life, disability, etc.
    I recently wrote about Michigan’s state employee plans (there are 18 of them because of the myriad of unions) and Michigan had full disclosure for all of its plans at the michigan.gov website.
    And while we’re on the subject of state employees, there’s a website you can go to — I think it’s the National Conference of State Legislatures — that lists the state share, employee share and total cost of insurance coverage for all 50 state employee plans in a spreadsheet.
    I haven’t looked into it to confirm, but I have to believe a similar resource would be available for the Federal Employees Health Benefit Plan.
    My point is, I believe this information is out there for most of us. We just have to read those things that come in the mail and say THIS IS NOT A BILL, instead of throwing it in the trash.

  3. //employees they partake in healthcare services less…so the cost actually does decrease.//
    Not if a health problem is exacerbated because an employee avoids services they actually needed.
    //for people to reduce their healthcare consumption without risking their health? Of course.//
    There’s no evidence for this at all. If anything, I think you’d be hard pressed to find people who go through the inconvenience and discomfort of a doctor’s visit just for the fun of it.
    //truly choosing between food and absolutley life saving medication.//
    I did! And I chose food.
    And when I’m hospitalized and unable to pay for it, people will be arguing for my “right to die” and complaining that “end of life expenses” are eating up health care.

  4. “It is moving the deck chairs on the Titanic in terms of containing overall health costs–they’re not going to be much affected by who ends up picking up the tab at the margins.”
    There’s some evidence that when more of the cost is passed onto employees they partake in healthcare services less…so the cost actually does decrease. Is there room for people to reduce their healthcare consumption without risking their health? Of course.
    This has to be part of the solution; take some responsibility for your own care and spending. There is a consumer model to be had in this.
    Despite the horror stories on NPR, only a tiny tiny percentage of this country is truly choosing between food and absolutley life saving medication.

  5. Sorry Eric I missed your earlier comment on total compensation. I don’t believe total compensation presentation will change any behavior on the part of employees. Many employees count earnings based on what they take home, i.e. everything below the line, not above it.
    I do agree with Matthews’s conclusion that employers are shifting costs to employees at an increasing level. I don’t believe it’s hypothetical. Using the Eric’s example, of demonstrating total compensation. If the W-2 showed a 2% increase in next year’s wages, but my benefits are reduced, did the employee really get a 2% increase?
    I am not a fan of pieces for blaming Wal-Mart for everything that’s wrong with America. Wal-Mart’s business model is the envy of most businesses. It is an efficient company that is constantly looking at making things better, faster, cheaper. It competes on price, which based on sales growth consumers appreciate. Legacy retailers suffered not because Wal-Mart did not offer benefits to its employees but because their business model wasn’t efficient. As far as comparisons to Costco, in terms of revenue Costco is fraction of the size of Wal-Mart but growing. Wal-Mart is a mature global company. Therefore, making simple comparisons based on profit margins is not entirely accurate. Costco had a 2% profit on revenue as of the end of August. Wal-Mart had 3.6% profit on revenue. However, Costco’s profits margin have been increasing at a much faster pace (20.5% for Costco compared to 13% for Wal-Mart). I doubt Costco’s gains are due to employee benefits.

  6. Matthew- a question: if companies, i.e. Walmart, presented total compensation data as a matter of course– like the W-2 proposal I made on the blog several months ago– do you believe that, over time, the race to the bottom would continue? My issue is that I do not believe that the public will have much stomach for progressive compensation cuts…

  7. //It ought to be how salaries and wages are presented to prospective employees.//
    Wow, a point of agreement. I’ve been arguing for this for years.

  8. Eric–I’m with you on visibility of total compensation, but if Walmart pays an average health benefit that is 50% less than that of Costco, and makes profits that are higher, you can’t tell me that the “total compensation” cost has no impact on its overall revenue and profitability. The result of the Wal-martization of America is a race to the bottom on employer-provided health benefits, with nothing to replace them–Matthew

  9. Matthew- the ubiquitous headline we see in the papers of “shifting costs to employees”, you must admit, is not factual. For a business, the cost of benefits is part of the total compensation of an employee. So, to say that costs are being shifted is not true. What needs to happen is that companies ought to report to employees total compensation at the end of each year. It ought to be how salaries and wages are presented to prospective employees.
    We do not know if costs are actually being shifted because we do not know total compensation and the increase in cost of healthcare.
    For example, if I make $14/ hour (about 28,000 per year) and get health benefits, the value of those benefits is about an additional $7000 per year. If healthcare costs (insurance) increase 10%, then next year, those benefits cost $7700. This amounts to a 2% raise for the employee (really more given then tax advantaged status of employer paid insurance).
    If the 10% cost increase is shared, the change could be eliminated so that there is no net increase in compensation.
    Companies ought to compete on total compensation, not just “salary”.
    Until individuals have the total compensation data– commentators and the public alike do not know if “cost shifting” has occurred. Increasing transparency is the first step to getting a handle on costs– workers should know if they are getting a raise, no change, or a pay cut.