One of the often overlooked historical aspects of America’s health care finance crisis is that employer-based medical insurance was largely non-existent until World War II. During the war, governmental wage and price controls prompted employers to offer medical insurance as a means to attract scarce labor without violating the wage controls. Employers quickly realized that such insurance was a cheaper way to attract labor than increasing wages, so the concept of employer-based medical insurance became a standard component of many American employers’ compensation plans for employees over the past generation.
Well, as this NY Times article notes, the market distortion of substituting medical insurance for direct employee compensation has generally benefitted employers, but now rising health care costs are making employer-based medical insurance more expensive than simply paying employees direct compensation. The Times article notes the following about Wal-Mart, which employs a large number of low wage earners:
The Wal-Mart work force reflects a growing fear of many employers that the people who work for them are increasingly at risk for health problems. Many of Wal-Mart’s employees are obese, the company says, and a result is rapidly rising numbers of cases of diabetes or heart disease. The prevalence of these diseases among Wal-Mart employees is increasing much faster than the national average, it says.
“The low-income population generally is not as healthy and does not engage as much in preventive care,” said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured. A risk that a company like Wal-Mart faces, especially when it competes with smaller retailers that offer no insurance at all, Ms. Rowland said, is attracting too many workers who want the job primarily for the health coverage.
Inasmuch as Wal-Mart pays its employees relatively low wages but provides a good employee medical insurance plan, the company is experiencing what economists call “adverse selection” — as the value of the wage component of the Wal-Mart employee compensation package has declined relative to the value of the health insurance component, Wal-Mart is attracting an unhealthier class of workers who apply for job at Wal-Mart primarily for the generous medical insurance. Wal-Mart’s management is attempting to reverse this trend by seeking to attract a healthier type of worker who is not seeking the job primarily for the medical insurance.
Nevertheless, the core of Wal-Mart’s problem is the market distortion in the employee compensation system that derives from substituting employer-based medical insurance for direct compensation. Couple that market distortion with the equally misleading economic impact of having third-party insurers pay for most health care choices and you have gone a long way towards understanding the basis of America’s flawed health care finance system. Alex Tabarrok has more on the issue over at Marginal Revolution.
I’ve long wondered why health insurance isn’t like car insurance — we all buy our own and it’s not tied to an employer. I would think the playing field would be more level that way.
Anne, there are important differences between auto and medical insurance, but you’re main question remains instructive. The reason that an individual health insurance market has not developed as in auto insurance is primarily due to the difference in tax incentives between employer-based medical insurance and individual health insurance. The former is tax deductible, the latter is not. Until the tax laws treat both forms of insurance equally, it’s doubtful that the economic incentive exists for a vibrant individual medical insurance market to develop.
Nevertheless, the core of Wal-Mart’s problem is the market distortion in the employee compensation system that derives from substituting employer-based medical insurance for direct compensation.
How do you enact actual reform, though?
The 2003 Medicare legislation contained important, although not revolutionary, reforms, in that it provided incentives for health savings accounts coupled with high deductible insurance plans. The cost of those important reforms was prescription drugs for seniors, which made darn near every “economic” blogger and more than a few Republicans scream that the sky was falling.
If the administration got that much fire over what it had to trade to get that much reform out of a narrowly divided Congress, then how in the world could it move a more ambitious healthcare agenda that an econoblogger might endorse?
I’m not asking that to be critical. I just am curious what reforms folks would propose that have any chance of getting through in the current political climate. Because, you know, I’m a political scientist and not an econoblogger, I don’t simply assume the politics away.
Kevin, as with most solutions to complicated policy issues, it’s going to take a variety of reforms to address the crisis in the health care finance system. However, the primary reform that can and should occur immediately is the differentiation of tax treatment for employer-based medical insurance policies versus individual medical insurance policies. Even the HSA-reforms — which is a positive reform of the current third party payor payment system — is curtailed because the market for individual medical policies is dampened by the adverse tax treatment provided to such policies.
Unfortunately, the GOP and many Democrats have hitched their political wagons to big business, which lobbies in favor of the current system that allows employers to buy cheap insurance at the expense of individual policy holders and HSA’s.
Addressing the market distortions of the third party payor and employer-based insurance systems are the keys to reform, but the political forces opposing such reform are well-funded. It’s going to take some real statesmanship — a quality that is lacking in the current American political landscape — to effectuate reform in this important area.
HSA’s are a great idea, IMHO. As far as Wal-Mart, it may eventually become more cost effective for Wal-Mart to simply open its own health care operation/HMO/whatever for its employees. Sam’s Club already sells health insurance, and their drugs are priced lower than anybody else’s if you buy without a co-pay. I think this is a far better idea that what the GM’s of the world want to do – dump everybody on their payroll into a government program.
Also, I think we need to address the fact that health insurance covers all kinds of stuff it didn’t used to, including expensive new procedures, drugs, and treatments. Health care in the U.S. is more expensive, mostly because it’s so much better.
I do appreciate that Walmart isn’t just taking the poor health of their employees lightly. They are requiring that jobs have an element of physical activity. (i.e. – cashiers must take a turn at getting carts in the parking lot)
Its sad to see not too many employees covered with health insurance. Health insurance can be a major aspect to many lives.
I had a question for anyone with info on walmart’s problems and their solutions towards them. Thank you,