Thursday, March 08, 2012

The economics of employer-paid health insurance

There's a wide variety of folks who claim that employer-paid health insurance was a side-effect of wage freezes during WW2. The claim is that employers couldn't raise their employees' pay due to the Federally-mandated wage freezes, so they instead started providing health insurance.

The thing is, this is unadulterated balderdash. If it had been a response to the wage and price controls, then employers would have immediately dropped the health insurance plans once wage and price controls were lifted after the end of the war and instead raised wages by that amount. But the reality is group health insurance is cheaper than individual health insurance, and that's why it became standard even for employers where 100% of the cost was paid by employees. The tax break is one reason, but by far not the only reason -- until recently, the cost of health insurance simply wasn't big enough to make the tax deduction a big deal, I paid something like $40/month for health insurance when I was a young adult for example, back when dinosaurs roamed the Earth and penguins lived in Antarctica rather than in the Silly Cone Valley.

So anyhow, why do I say that group health insurance will invariably win out over individual health insurance in a free market for health insurance? Let us list the reasons why:

  1. Reduced marketing costs. There are 10 million businesses in the USA. There are 115 million households in the USA. You do the math -- group plans have 1/10th the marketing costs.
  2. Reduced billing and collection costs. Again, 10 million bills, 10 million checks to process, rather than 115 million bills and 115 million checks to process.
  3. Increased reliability of collections. Businesses tend to pay their bills on time due to having automated processes for collecting the money out of people's paychecks then cutting a check to the insurance company (or e-paying them). Individuals pay when they pay, and you have to deal with late pays, missing pays, and all sorts of other billing issues if you're billing individuals.
  4. Homogenization of product. Individuals would want all sorts of different insurance policies and you'd need to provide all of them or your competitors would win the business for the ones you want to provide. But by selling to businesses, you can sell one of a very few insurance products, which greatly reduces your cost of selling and administering insurance plans, because businesses are primarily interested in getting the cheapest insurance acceptable to their employees.
The reality is that in countries that have evolved a universal health care system, a large number of them started from the viewpoint of having businesses pay for and administer the plans. For example, traditionally in Germany the only time you got health insurance provided by the government was if you and everybody else in your family was unemployed -- otherwise your employer handled registering you and your otherwise-uninsured family members with the health insurer for your region and employer type, and sending them the check for your health care costs. Japan works like that too -- employers handle the collection and registration part of providing health insurance. Given that in today's capitalist countries virtually everybody is employed, it's simply easier/cheaper to have the employer enroll you and take the money out of the paycheck and send it to the insurer, rather than to directly bill or enroll individuals.

In short, in virtually every country that doesn't have centralized socialist healthcare where everybody is automatically insured and automatically gets the money taken out of their paychecks as taxes, you'll find employers directly involved in the enrollment and provision of insurance, because it's simply cheaper. There is only one Switzerland (where insurance is provided on an individual basis rather than group basis), and even Switzerland has been Switzerland for less than twenty years (before that the primary funders of healthcare were employer-based group plans like the USA) and individual insurers haven't been driven out of business by cheaper group plans there only because group plans have been banned by government fiat. When you have group plans and individual insurers in the same system, people buy individual insurance only when they're self-employed... because otherwise, it's simply cheaper to buy it through your employer, even if you're paying 100% of the cost out of pocket.

-- Badtux the Healthcare Economics Penguin


  1. We would do well to take the next logical step: kick the insurance companies to the curb and embrace the single payer concept. There are many compelling reasons why we should do this and no compelling reasons not to. Sure, it would be socialized medicine, but I prefer pragmatism and socialism to elitism and stupidism.

  2. Indeed, if 10,000,000 customers are cheaper to deal with than 110,000,000 customers, then 1 customer (the U.S. government) is cheapest of all. But that wasn't the question I was addressing. The question I was addressing was why, in any free market health care system, group plans end up squeezing out all but cherry-picked individual plans (i.e., individual plans offered only to the healthiest populations).

    - Badtux the Helpful Penguin

  3. Badtux, I am only vaguely familiar with how healthcare in other countries operate. France is famous for its system but it is not "socialized" medicine per se like the NHS in the UK because its physicians are privately employed. However, does France merely subsidize physicians for whatever costs that patients incur? How did its system get put into place?

    It seems a true "freemarket" healthcare system of the sort that Republicans are always jacking off to is impossible. This because it is an essential service for many people which removes any sort of bargaining leverage a person might have since catastrophic injuries or life-threatening illnesses will not wait for the victim to "shop around" so providers are free to charge as much as they want as it is literally "your money or your life". In addition, health insurers are exempt from antitrust legislation (Why?) and so a single company often controls large swaths of several states effectively locking out competition. Because of healthcare's necessary but costly nature the only way that private insurers can afford to cover all of these people is by charging exorbitant fees and premiums to keep themselves profitable and this also creates a perverse incentive to deny coverage whenever possible. These problems are inherent in the very nature of medical care and no amount of "deregulation" or further "privatization" can solve them simply because a "fair" private insurance company would soon find itself declaring bankruptcy if it did not find ways of maximizing its profits at the expense of its clients. As it is, it is impossible for even a young and healthy single adult such as myself to even afford a junk plan on my own without compensation by an employer. Like most people, I do not have the option to simply purchase the best plan possible because I am already priced out of the market as it is. A purely freemarket system of healthcare is simply unworkable.

    Due to a combination of history and corporate influence in the US government; getting rid of the stranglehold that private insurers have on access to medical care is politically impossible. We have been stuck with this system for so long that it is considered "traditional" by our politicians as well as the fact that insurance companies donate millions to key officials at both the state and federal levels. These pet lawmakers are never going to bite the hands of the masters that sign their checks. The practical is almost always subverted by the political and financial.

    As "Obamacare" is nothing more than the same Romneycare turd with an added racing stripe I am highly skeptical that it will accomplish anything of value. I admit that I am far from an expert in the nuances of the bill, but it seems to me that there would be nothing stopping HMOs from raising their costs sky high in response to being forced to cover high risk people to make up for profit losses.

    Would this not simply lead to a system where we all have to buy expensive "junk insurance" that does not cover shit or pay a penalty to the IRS when the rest of this bill goes into effect? It seems that this would make our broken healthcare system even worse. Supposedly there is a provision in place for a subsidy to help people who genuinely cannot afford a plan on their own, but this would quickly be undone by the lack of price controls.

    Some have argued that this is merely a foundation that can be revisited and added to later to improve it. However, as evidenced by the toxic nature of the teabagger healthcare shitstorm in 2009 no politician is going to be willing to open that can of worms ever again and so I think that we are never going to see more than the 2009 bandaid on this issue. The Republicans will continue to try and rollback the scant positive gains that this bill has accomplished while the Democrats probably think that healthcare has been fixed and will shelve any further debate on this matter.

    What are your thoughts on this?

  4. Neurovore, the Obamneycare bill has a cap on medical loss ratios and requires certain levels of coverage to be "qualifying" plans (thus the fuss by the Catholic church over covering birth control -- covering birth control is necessary to be a "qualifying" plan), so insurers can't simply raise rates sky-high on junk and still be a qualifying plan. For the 90% of people with health insurer who get it through their employer there's no change at all under Obamneycare, which is why it polled highest of the three alternatives presented by pollsters -- all of which got over 50% support, but the Obamneycare plan got over 70% support when referred to by its distinguishable policy traits rather than as "Obamacare". In other words, it passed because more people liked it because they'd have no change in their health insurance.

    Regarding France, they started out similar to Germany, with each state and industry having its own health insurance cooperative and must-buy / must-provide requirements. Over the years the French simply rolled the insurance rates into payroll taxes and merged the not-for-profit health insurance cooperatives, there's now only a couple of them left and they're overseen by the Ministry of Health and they get their funding from payroll taxes rather than by billing employers the way they originally did. France also has employer-provided "Medi-gap" insurance to cover things that Medicare doesn't cover. So basically the Obamneycare plan has a long-term endgame of Medicare For All, but it's *way* long term or it could take a really extraordinary thing to make it happen -- it took the British around forty years to get from Obamneycare to the National Health Service, and they did the NHS only because there wasn't a solvent company capable of buying health insurance for its employers anywhere in the country so it was a case of NHS or no health care for Britons.

    So anyhow, the US is about 100 years behind the rest of the world on how to provide health care to its people, what just got instituted is what the rest of the world instituted a hundred years ago. But the rest of the world moved on to more cost-effective ways of providing health care, and the US will too, because there simply is no choice -- that's the only way to reign in the providers who are gouging us big-time (yes, it's the providers -- doctors, hospitals, drug companies, medical equipment companies -- that are the cause of high healthcare costs in the US, *NOT* the health insurance companies, whose profit overhead accounts for around 5% of our total healthcare costs).

    - Badtux the Healthcare Economics Penguin


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