In the latest issue of the Journal of the American Medical Association (JAMA), the always-compelling duo of Ezekiel Emanuel and Victor Fuchs—associated with the National Institutes of Health and Stanford University respectively—dispel the myth of “shared responsibility” in health care financing.
What does this mean, exactly? Simple: “the common claim that employers, government, and households all pay for health care is false. Employers do not share fiscal responsibility and employers do not pay for health care.” In fact, the “money [for health care] comes from [our] own pockets.”
As simple as this assertion may seem, it’s actually a ground-breaking statement. As Emanuel and Fuchs point out, most of the political rhetoric surrounding health care reform implies that everyone—individuals, employers, households, and governments—struggle with health care costs equally. Implicit in this formulation is a sad tale of businesses getting crunched: Because employers provide health coverage to most Americans who are insured, employers are often singled out as victims. It often seems like the health care crisis is their burden.
Indeed, “burden” is quite the buzzword here. Barack Obama says it’s a tragedy “when businesses have to lay off one employee because they can’t afford the health care for another.” Hillary Clinton notes that “large American companies compete in a global economy against companies in countries that impose far lower health care burdens on employers.” Congress celebrates reforms that supposedly “takes [the health care] burden off employers.” It certainly sounds like businesses have it bad.
Not so fast, say Emanuel and Fuchs. We need to consider the “health care cost-wage tradeoff.” A large body of economic research shows that, when you crunch the numbers, employers don’t lose the money they spend on health care, but rather take the costs out of their employees’ paychecks. In fact, a 2004 study from the International Journal of Health Care Finance and Economics found that "the amount of earnings a worker must give up for gaining health insurance is roughly equal to the amount an employer must pay for such coverage."
This unsettling trade-off has been going on for the past 30 years.
Consider the fact that over this period “premiums have increased by
about 300 percent after adjustment for inflation” while
inflation-adjusted corporate profits have “flourished…with…increases…of
200 percent after taxes.” A two-fold increase in profits hardly seems
an indication of hard times.
Workers’ earnings, on the other hand, have felt the pinch: “average
hourly earnings of workers in private nonagricultural industries have
been stagnant, actually decreasing by 4 percent after adjustment for
inflation” over the past three decades. If health care costs are
burdening someone—as we know they are—its not so much businesses as it
is the average Joe.
Working stiffs also lose out when public sector health coverage gets
too expensive. Here the trade-off is perhaps more obvious than in the
private sector: in order for governments to fund health coverage, they
need to tax citizens, borrow money, or cut other services. There’s a
“public service” cost that all of us, as citizens, bear. A government
that’s consumed with health care can’t do much else.
Troublingly, when states scramble to find health care dollars,
education is one of the first things to go. Emanuel and Fuchs reference
striking research from the Rockefeller Institute of Government showing
that, in times of health care-fueled budget crunches, higher education
takes the biggest hit. Looking at 10 representative states, the Institute found
that, thanks in part to sky-rocketing Medicaid costs, states “projected
spending 4.5 percent less on higher education in FY 2004 than in FY
2003” and “raised tuition and fees by almost 14 percent on average." Costly
health care translates into unaffordable education.
The irony here is that education is a key health care issue. The College Board reports
that the higher the level of education, the more likely an individual
is to engage in regular physical activity, refrain from smoking during
pregnancy, and adhere to Type 1 diabetes treatment regimes. In other
words, if we compromise education, then we compromise America’s
health—it’s a lose-lose situation.
Any way you cut it, high-cost health care ultimately hurts citizens more
than it does employers or the government. On some level, we may grasp
this; but too often the discourse around health care reform assumes
that people and institutions are shouldering the same load. That’s not
the case.
Politically, this is a distinction that needs to be made clearer.
Emanuel and Fuchs are spot on in saying that people need to understand
that there’s no “free lunch” when it comes to health care. If they
don’t—if it’s never made clear that the biggest loser in our health
care system is patients—than the motivation for sweeping reform will be
diluted. We’ll think that the spiraling health care crisis is someone
else’s problem—when really, it’s ours.
Not America’s, not society’s, but literally mine and yours.
Not sure I buy this … Most Physicians’ practices in Queens, NY employ mostly part-timers because they cannot afford the cost of health insurance for full-time employees. Though admittedly the copays are rising, the premiums are paid by the employers and salaries for full-time employees have NOT been lowered. Apparently, the only member of the physician’s office in Queens NY whose salary IS lower is the Physician.
Have to agree with DOC99, I dont think if we got rid of health insurance everyone who was getting it through thier employer would get a 12K a year raise. It is a complex dynamic, if you have to compete for good employees you often must offer it, so it is a cost of doing business, and it could be considered part of a wage package, this was proliferated during the wage freeze during WWII. In fact by this theory you should be able to make a lot more doing the same job as someone else at an organization that doesn’t offer health insurance, additionally, similar jobs in countries where the govt covers health expenses should offer a greater pay, I dont think this is true.
I believe this. I have worked for several companies who would remind workers that part of their salary is their health insurance — which it isn’t, it’s a benefit. It was used as justification to pay people $10-15K below market value.
Niko
You are also forgetting about legacy costs. It is not just about the wages current workers forgo, it is the money that needs to be spent on retirees. That is where Detroit is getting slammed and where profits and competitiveness are getting hit, at least in certain industries.
brad
It is a certainty that employers do not raise salaries by lowering health care benefits — any more than lower resource costs result in the decrease in price of the finished product. As a rule, increased resource costs will result in price increases that go beyond the addition front-end cost. The man making these decisions (business owner or operator) always puts himself first.
When the small business owner determines that he “can’t afford” to pay healthcare premiums for employees, I believe that claim should not be accepted at face value. It might be more like, “I can’t afford to pay the premium and spend four weeks a year in Aruba.”
I’ve worked quite a few years at various small businesses and I have found that it is largely the case that owners tend to regard any employee-related expense as a burden, even an “excessive” burden. It’s extremely unlikely that the employee will get fair treatment at that level.
We might be best to look at this discussion at a higher level, where healthcare actually gets the most attention, midsize and larger businesses.
Thanks.
mp
Is this really news? This is not true only of health care, but is also true of anything labeled “paid by employer” including any tax, or whatever. It’s call the ‘cost of employment’ which is equal to the salary of the job plus all the other costs associated with employing someone. Did anyone out there honestly believe that employers were taking the price of paying for their employees’ insurance out of the company’s profit?
I hope there wasn’t a lot of tax-payer money spent on this ‘research’.
All,
Thanks for the comments. The issue here isn’t that health care isn’t expensive or that employers aren’t paying more than they’d like– but rather, that they have a safety-valve to make up for those costs (wages). over time, as health care costs go up, wages stagnate, in part because this is how businesses can make up for their expenses.
Employees, on the other hand, have no such recourse to make up for the costs. The buck stops with them, as it were. Thus the argument that everyone suffers equally–which is something you find often in the politics of health care–isn’t entirely true. Employers can offload the costs onto employees.
drmatt, the relationship isn’t so simple. health care isn’t the one thing that keeps wages down (so eliminating it won’t mean wages automatically increase, particularly for reasons of self-interest, as mp points out). Even were this to be the case, there wouldn’t be a wide disparity of wages across firms as you suggest.
First, an employer that can’t afford to provide health benefits likely can’t provide super-high incomes. Second, even it did that would be foolish–each firm wants to offer as little as it can and remain competitive, in order to find the equilibrium between competition and cost-minimization. In a labor market where wages are stagnant, that means employers don’t have to go all that high.
Tom, this may seem obvious to you, but it’s certainly worth pointing out. Even the conceptualization of our system–“employer-based”–distorts the fact that employers handle the transaction, but workers end up carrying the load.
The general historical point here is that health care inflation has contributed to wage stagnation over time, because wages had to stay level–at least in part–for employers to cover growing health care expenses.
Maggie,
You’re right that to what extent wages have stagnated, part of the influence has been the increased cost of health insurance.
Of course, the alternative would have been to increase the dollar value of the wage but stop covering the employee’s heath insurance. While I, personally, favor this route (as it makes people responsible for themselves) I recognize that employers generally can leverage insurance companies for better rates and can an individual.
So, in reality, employees have gotten a hidden raise each and every time the employer was forced to pay to cover their health insurance (so long as the wage did not decrease in inflation-adjusted dollars). Further, the value of their hidden raise was greater than the increase in the number of dollars the employer spent for health insurance since the lone employee would have paid more in premiums without the leverage of the company’s group discount.
I guess my only question is…what’s the problem here? (With tongue-partly-in-cheek.)
As a physician and a small business owner with employees, the cost of health insurance absolutely affects salaries and the ability to attract and retain employees.
I read the article you refer to. I have a different take on it.
It is called individual responsibility. Laws should be enacted to give the individual the same tax benefits as corporations for the deductibility of healthcare. State mandates for insurance requirements should be lessened, to bring the cost of insurance premiums down. Group policies should also be allowed for any type of group, regardless of employment. This would make insurance affordable, portable, and the responsibility of the individual. This would bring the consumer back into the equation of healthcare, and make healthcare costs transparent again, a much needed change.
I believe the inefficiency of health care( lack of dollar value per dollar spent) is the real issue. Health care money has been so insulated from the consumers critical market ability for so long that we now have a large part of the economy that HAS LESS VALUE THAN INVESTMENT….If employers quit “paying” and the patient/ employee feels the cost directly I think the sub prime Housing crunch will be echoed.