Would We Be Better Off If Employers Stopped Paying for Health Insurance?

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.”

He writes:

“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.

16 replies »

  1. It is difficult for any large purchaser of insurance to be aggressive unless they are able to collect all the data that governs costs and utilization. Now, state and federal laws protect health insurers from disclosing this data as part of “trade secret” laws that govern many businesses. Hence, large employers often turn to self insurance because they are not subject to regulation and will own the data on costs and utilization. The difficulty is they will also own the risk. If we are serious about reducing health care costs then we must have the data to begin the analysis. We must repeal all trade secrets health insurance laws.

  2. That is patently false. What about in countries where employers do not provide insurance? Those employers do fine.

  3. It may not be productive to consider all employers as a bloc.

    The larger employers who self-fund may be having a different impact on health costs than the smaller employers who buy commercial insurance.

    The employers who need health insurance to attract new hires have a very different impact than the low-wage employers who hate health insurance and will go to great lengths not to pay for it.

    Though I am not a great scholar in this area, I do not know of any other industrial nation that expects employers to control health costs. Nor do other nations expect the patients to act as the kamikazis of health costs by enduring high deductibles. (“Your cancer drugs are monstrously ovepriced…I’ll show you!”)

    As Dr Reinhardt has pointed out, we do not have a coalition of payers who can demand lower rates, and the US Congress has shown no ability in that area either. I am not sure what it will take.

    We do not have

    Employers have always had a vested interest in employee productivity and good health insurance programs are the key. If Obama is successful in destroying employer provided health insurance that will be the first step to establishment of a Fereral Single Payer Plan along with massive rationing of healthcare to seniors to pay then bill/

  5. Reinhardt is dead on. Uninformed employers have willingly subjected themselves to third party intermediaries promising effective results. Employers who have eliminated third party interference have faired much better.

  6. “Tinkering at the edges”. “Rearranging the deck chairs on the Titanic”. It seems silly to me to blame a participant for a broken system. It doesn’t much matter who pays for it; until the provider incentives change the system stays broken. Currently nobody who has any control over cost has any incentive whatsoever to reduce it. They’ll tinker with it. Big deal.

  7. Since it looks like we won’t be able to level the playing field for all Americans by having Medicare-For-All, then we should at least level the playing field for all Americans by eliminating employer-based health insurance plans, including plans that cover government workers at all levels of government, and plans that cover career politicians, many of which are covered for life!

    It’s welfare for the rich as its worst for a multimillionaire plutocrat like Dick Cheney–who, by the way, is a war criminal in the eyes if the Hague — to be handed a million-dollar winning lottery ticket for a heart transplant, that’s paid in full by the the US taxpayers. Dick Cheney has got more than enough money to pay for his own health insurance. In fact, he’s got more than enough money to pay for all of his healthcare, including his million-dollar heart transplant, out of his own personal bank account.

    Another advantage to getting rid of employer-based health insurance is that it will enable workers to move and seek employment elsewhere, or make it easier for them to strike out alone as entrepreneur without having to worry about losing their health insurance. I can’t think of a better way to support entrepreneurship, besides having Medicare-For-all, than to let employer-based health insurance go the way of the dinosaurs!

  8. CMS hasn’t “taken on” anything with the payment reforms. They are all in the “science project” stage and the buzz about how they are going is far from encouraging.

    Wait ’till CMS actually tries to implement anything, and we’ll see how the dragon reacts. As you point out with the DME example, our dragon has a lot of friends in Congress. . . .

  9. Employers are wimps. Their time as the organizing nexus for health care coverage has passed.

    Here in MN, we had a coalition-of-the-willing among large ERISA-preempted employers, called the Buyers Health Care Action Group. The infrastructure was well done, replete with risk adjustment, medical homes, quality ratings, VBID, and… most crucially… provider bidding. The only problem was, these supposedly-enlightened employers wimped out.

    When it came time to set payroll-deduction amounts that were meant to reflect the quite-significant cost deltas, the typical employer was unwilling to follow through because employees would be “upset”. This was living proof of Uwe Reinhardt’s thesis, and it was deeply disappointing.

  10. The ACA;s insurance provisions are one thing, Jeff. That it takes on delivery system reform in a way that private payers did not/are afraid to — your comment in another post about the “dragon’ — is a separate topic.

    Of course, when 200 of our elected representatives, Republicans and Democrats alike, protest competitive bidding for durable medical equipment supplies, we know that Congress believes in capitalism just as long as no one powerful gets hurt.

  11. They didn’t call it a “fringe” benefit for nothing.

    Years ago, I talked about the employer’s vision of the health system as that of a dragon in a dark room. They are afraid of the dragon, because its keepers sit on their boards, and because it periodically goes on rampages and scorches their earnings. And the complexities introduced by moral hazard get so complex they cannot tame the dragon themselves. That plus the dragon is a protected species because in our society’s odd cultural/religious system, what it does is “sacred”.

    It’s where we begin hiring a security force made up largely of actuaries, salesmen and IT specialists to tame the dragon that we get into trouble. Employers don’t actually want them to kill the dragon, or even hurt him very much, so the message to our security forces is muddled. Then they start trying to get the dragon to wear diapers, or do something about its breath, etc.
    and don’t do much about the rampages.

    And it’s a really big dragon, bigger than France or Russia. . . It’s not that employers don’t “care” about the costs. They are just fundamentally overmatched and blinded by their religious beliefs. . .

  12. Let’s see how good a job the government did w/ ACA, Michael, before proclaiming it our savior. My guess: ACA massively increases the carrying cost and final price to most consumers of insurance, while making the market marginally fairer and perhaps covering 20 million people.

    People are going to be puzzled, then furious, at how skimpy the benefit is, leaving 40% of the cost uncovered, pre subsidy. And the administration will blame it all on the health insurers, and there will be fresh articles about their overhead, executive comp, etc.

    It will be difficult to calculate the net benefits to society of this law.

  13. Interestingly, David, you don’t mention one of the biggest alleged advantages of the employer-based system for health insurance; that is, the ability of individual employers (at least large ones) to customize their health and other benefits so as to attract and retain the best employees. That customization, of course, is why it makes perfect sense for every large employer to spend tens of thousands of dollars or more annually on benefits consultants — or, at least, that’s the way I learned it when I worked for one of them.

    Meanwhile, remember way back in Nov., 1988, when the editor of the New England Journal of Medicine announced that a “revolt of the payers” meant that an era of “assessment and accountability” was at hand? (See: http://www.nejm.org/doi/full/10.1056/NEJM198811033191810).

    Alas, when marketplace power failed us, for the reasons both of you lay out, government (see: the Affordable Care Act) did not.

  14. Reinhardt is dead on. Uninformed employers have willingly subjected themselves to third party intermediaries promising effective results. Employers who have eliminated third party interference have faired much better.

  15. Uwe’s post and David’s collaborative comment are a brilliantly clear exposition of the potential for health insurance exchanges just as they are coming onto the national landscape. Let’s hope that the regulators actually allow the exchanges’ plans to reflect the diversity of what Dranove calls “heterogeneous workers”.

    Powerful health insurance exchanges are not going to be enough. People also need the personalized advice of professional advocates to help pick the right plan. In the case of other equally expensive choices, we call these professional advocates accountants or lawyers – people we pay directly by the hour to work without any conflict of interest.

    Who will be our professional advocates in choosing at the health insurance exchange? Will I be able to give these advocates access to my specific health care expenses and clinical situation without interference from the providers of clinical and insurance services?

    Blue Button Plus for both health service providers and health insurance companies is an absolute must.

  16. Well, I couldn’t resist:

    I stand by my economic and strategic analysis, but that does not mean I disagree with Uwe Reinhardt in the grand scheme of things. Let me explain. As has been widely discussed by countless business economists, firms must carefully choose their vertical boundaries – what aspects of the vertical chain will they take upon themselves to “make” or partially make, and what will they leave to the market. If anything, the trend in recent years is for vertical disintegration, with most activities left to the market. Nowadays, firms routinely outsource many key inputs into production. When those inputs must be coordinated into the production process, they will work with the supplier to assure a proper fit. But when the input essentially plugs into production, they rely on competitive bidding and remain passive. Employer-sponsored health insurance is a “plug and play” input, and if employers are going to purchase health insurance, they are well advised to remain passive purchasers.

    But I think that Uwe Reinhardt is making a much larger point, namely that we would be better off if firms did not purchase health insurance. This is passivity taken to the limit, and again can be subject to economic analysis. The employer-based system does convey benefits, perhaps the biggest are protecting workers against reclassification risk and encouraging cross-subsidization in large risk pools. Employers may also have some purchasing clout. These may explain why employer sponsored insurance dominated individual insurance even before the tax code was changed to exempt employer purchases. But there are drawbacks as well. The tax code attenuates employer and employee concerns about costs. Employers make one size fits all purchases on behalf of heterogeneous workers. And even when firms offer more than one plan, if those firms require workers to pay the full cost difference of the more expensive plans, an adverse selection death spiral may result. As a result, firms usually subsidize the more expensive plans leading to further inefficiencies.

    State and federal regulations have all but eliminated reclassification risk and we are on the verge of setting up viable exchanges that may pool risks and allow workers to enjoy purchasing clout of their own. The economic rationales for employer sponsorship have become less important. If we can level the tax exemption playing field, employer sponsored health insurance would be a thing of the past. Now that would be a degree of passivity that would please both Uwe and me!