Myth # 5: Employers that don’t provide health insurance should be forced to.

Employer payments for employee health insurance are just another form of worker compensation. The more an employer pays for health insurance, the less it will be able to pay its workers in the form of take-home pay and other benefits. From an economic standpoint, there is nothing controversial about these statements. Yet there is a common belief in political circles that government can require employers to pay more for health insurance and that such payments will somehow come out of employers’ coffers without affecting their employees’ disposable income. Alas, it doesn’t work that way. Any way you slice it, it all comes out of the employees’ pockets.

In a 2004 article in Health Affairs, Uwe Reinhardt, Peter Hussey, and Gerard Anderson lay out a scenario of a firm able to pay its workers total yearly compensation of $35,000 each, including $8,800 (25%) for health insurance and the remaining $26,200 (75%) for take-home pay (I’m ignoring taxes and other benefits for the sake of simplicity). They further assume 4% annual compensation increases and 10% health insurance inflation. By the tenth year, a worker will be earning total compensation of nearly $50,000, of which almost $21,000 (42%) will be required for health insurance premiums, leaving $29,000 (58%) for take-home pay. Despite insurance costs taking a progressively bigger bite out of total compensation each year, the worker still sees higher take-home pay, albeit by progressively lower percentages each year. The big problem, however, arises in the eleventh year. That’s when health insurance cost increases will exceed total compensation increases, forcing the employer to choose either to reduce worker’s take-home pay, to lose money as a firm, or to reduce or drop health benefits altogether.

Workers of all collar colors are notoriously reticent to accept reductions in take-home pay, and employers are equally resistant to losing money and ultimately not being able to hire any employees at all. That is why we don’t have to wait 10 years to see employers--particularly small ones--dropping health insurance. Many are, in effect, already in their 11^th year. That’s why we see only 60% of all employers offering health benefits in 2007, down from 69% in 2000. It’s much worse for small employers, with 45% offering such benefits in 2007 versus 57% in 2000.

These firms, faced now with the realities embodied in Prof. Reinhardt’s scenario, are rationally deciding they’re better off just paying out to their employees the money they previously spent on health benefits, and letting them figure out how to buy insurance on their own in the individual market. In most states, such individual insurance is frequently affordable for the young and healthy—albeit with more expensive after-tax consumer dollars. The problem is that older workers may have difficulty affording it and those with serious medical conditions can’t get it at any price.

In attempting to fix this problem and to force employers to continue to provide health insurance, the federal government and various states are now proposing or imposing mandates both for employers to contribute a minimum percentage of total worker compensation toward health benefits and for employees to be required to purchase health insurance. Massachusetts is the current poster child for this concept.

An important lesson from Prof. Reinhardt’s employer scenario is that any such mandate is nothing more than an enforced diversion of worker compensation for a government-favored use—in this case, the support of a bloated, inefficient, inflationary health care system that, fully half the time, fails to provide good care. It is a burden placed squarely on the shoulders of workers under the more politically attractive guise of an employer requirement.

Most employer mandate proposals would require employers to pay a certain percentage of total employee payroll for health insurance. Thus, employer contributions to worker health insurance would now increase only at the same rate as overall compensation increases, while insurance premiums themselves would continue to rise at two or three times that rate. That would leave employees to pay all of the difference directly in the form of increased payroll deductions that will now necessarily rise even faster than the medical inflation rate. If we apply such a mandate to the above example of the worker earning $35,000, his employer’s payment for health care costs would now go up only by 4% each year, while the employee’s share would increase by 12%--higher than the 10% health care inflation rate itself. Thus, what initially appears to be a state-imposed burden on employers is actually a form of government-imposed relief that removes from the employer any further concern about health care inflation. Employers can now, with government assistance, pass off that worry entirely to their employees, but without giving them any means to deal with the problem. The math is simple for anyone with a calculator, something apparently in short supply in some politician’s offices.

It is critical to recognize that such mandates do nothing to reduce the high rate of health care inflation or to assure high quality care. Those are artifacts of forces that are unaffected by reducing the number of uninsured. In fact, any increased demand resulting from more people with insurance could actually worsen inflationary pressures.

Nonetheless, mandates can help employees in two ways—albeit extremely inefficiently. First, they assure that at least a part of employee compensation—the part used to pay insurance premiums--will be sheltered from taxes, an advantage that is lost for employees faced with buying their own insurance in the individual market. Second, they allow employees to get insurance at group rates that are sometimes—but not always--more favorable than those available with individual insurance. There are much simpler ways to achieve these advantages, and with the added benefits of offering universal health insurance, improving quality, reducing medical inflation, and dramatically improving disease prevention. Employer mandates won’t get us there.

Copyright 2008 by Stephen S. S. Hyde. All rights reserved. Quotation of excerpts permitted with attribution.

Myth #4: We have so many young people without insurance because they think they’re immortal and don’t need it.

We often hear about people in their twenties and thirties who don’t buy health insurance, even when it’s offered by their employers. The most common explanation is that they are young and foolish and don’t understand the need for health insurance. They seem to think they’re immortal and don’t need it.

I believe most of them are actually behaving rationally in their response to a system that is seriously biased against them in favor of older workers. The problem is not one of employee ignorance, but employer discrimination.

We know that about a fourth of all uninsured individuals have access to employer-sponsored and subsidized insurance, but they decline to take it. We also know that the increase in the uninsured over the past two decades has been almost entirely from those who refuse to participate in employer-sponsored insurance, rather than from reduced offerings of insurance. A large share of these voluntarily uninsured are younger employees.

Most employers that offer health insurance require each participating worker to pay part of the premium through payroll deductions. Often it’s a big contribution. For example, an employer might contribute only a portion of the employee-only premium, while requiring the worker to pay the remainder plus the entire premium amount for his spouse and children.

Younger employees tend to use considerably fewer health services than older ones. They also make less money—often a lot less—because of their relative inexperience and lack of seniority. Here’s the rub. Virtually all employers require the same premium contribution from younger workers as older ones. Thus, a 25-year-old municipal worker with a wife and two young children is required to pay the same premium as his 60-year-old colleague who has a wife and two children in their teens and early twenties. This is despite the fact that the insurance company actually charges the employer far less for the younger worker’s coverage because of its use of age-rated premiums.

Thus, younger employees are required to pay more than their share to subsidize older workers, and many of them just don’t see that as a good value. As a result, many are declining coverage as simply a bad deal they can’t afford.

As the pig-in-a-python baby boomer generation approaches retirement, average workforce aging, combined with such community rated employee health premium contributions is making health insurance increasingly unaffordable for the young, which accounts for a large portion of the increases in the uninsured.

Young workers aren’t being naive; they’re being screwed. If employers charged age-rated premiums the same way their health insurance companies do, it could go a long way toward making health insurance affordable for younger workers. At the same time, older workers would have to pay more, but at least they are more likely to be able to afford it.

Myth #3: A third of all health care cost is incurred during the last year of patients' lives.

Medicare has reported that it spends nearly 30 percent of its $408 billion budget (2006) on its beneficiaries in their final year of life. That works out to about $122 billion per year in end-of-life care, or about 5% of total health care expenditures. That’s a tidy sum, but not the bank-breaking amount many commentators would have us believe. One can pick nits and say that Medicare's coverage for the elderly and disabled doesn't quite include all deaths, but that doesn't change the basic point that end-of-life care, while expensive, is not taking up the lion's share of our national health care expenditures.

Nonetheless, there is a lot of room for improvement in how America’s hospitals and doctors deal with end-of-life treatment. The amount spent varies tremendously depending solely on which hospital one has--literally--ended up in. The wondrous Dartmouth Health Atlas (http://www.dartmouthatlas.org/) has reported that care provided by Manhattan’s New York University Medical Center to an elderly patient with multiple medical problems during the last two years of life costs $105,000. U.C.L.A.'s Medical Center runs $94,000. Contrast that with Mayo Clinic’s world-renowned teaching hospital in Minnesota that costs only $53,432.

One difference in such outcome variations is apparently due to how well patients--and their families--are informed about options and listened to with respect to how they want to live their final days. Ideally, such fully informed wishes would always trump doctor and institutional proclivities toward extraordinary efforts, but alas, they don't. Incidentally or not, such heroic measures seem to invariably result in greater doctor and hospital revenue.

All this begs the question of how much should we collectively spend on health care at any stage of life, and more important, who should decide? Many pundits, politicians, doctors, and even economists seem to believe this should be answered via our democratic political process, and that it should fall on our elected and civil service officials to make these expenditure decisions for us--as they now do for the elderly, disabled, and poor. That, in my view, is a terrible, dehumanizing approach that runs counter to almost everything we stand for as a country. It removes the individual from decisions that only she can intelligently, fairly make.

Fortunately, we have available a parallel decision-making process by which the national will on health care expenditures can be rationally determined. It is via the expression of individual will through an even more democratic process than the political one--free, transparent, and open markets that allow each person to make his own decisions about how much he is willing to spend on health care and for what. Through this democratic market process—with the inclusion of a substantial safety net component—the collective will can be made known in the form of the grand total of all voluntary, individual expenditures for health care goods and services—just as it is with our even more essential needs of food, clothing, housing, and transportation. In other words, total health expenditures should be an output amount determined by individual decisions, not an input amount pre-established by politicians and bureaucrats--no matter how well-intentioned.

Thus, I pose the question: Which do you trust more, our collective will expressed through individual choice, or the quality of the sausage extruded through the tail-end of the political meat grinder? My fear is that the current national mood may actually favor the latter. Yet my roseate optimism whispers that--despite whatever detours we may take--sooner or later we'll be willing to try even a market-based solution. Sooner would be better.

Copyright 2008 by Stephen S. S. Hyde. All rights reserved. Quotation of excerpts permitted with attribution.

Myth #2: Our biggest problem in health care is that we have 46,000,000 uninsured people who either can’t get insurance or can’t afford it.

The Census Bureau estimates we have 47 million Americans with no health insurance. Most pundits seem to think all these folks either have no access to coverage or simply can’t afford it. That is not true. Many reform advocates claim that this is our biggest problem in health care. That also is not true.

My own analysis of the data indicates that nearly two-thirds of the 47 million uninsured actually have access to affordable insurance, but have chosen not to purchase it, due to indifference, lack of perceived need, or different personal priorities. They include 13.9 million who are eligible for Medicaid, but haven’t signed up. There are another 9.9 million who are eligible for individual health insurance and able to afford it. Finally, there are 6.9 million workers who are eligible for employer-subsidized coverage, but who haven’t opted for it. These people, some 31 million strong, are the voluntarily uninsured.

That leaves 16 million people who are involuntarily uninsured. And only 7 million of those are truly the hardcore uninsured. That’s because the 16 million includes another 9 million people who would be able to afford insurance if the states dropped their laws that require health insurance to cover services of doubtful medical necessity--such as chiropractors, social workers, massage therapists, dental anesthesia, infertility treatments, acupuncture, wigs, and drug and alcohol abuse treatment. These benefit mandates increase insurance premiums by 20% to 50%, depending on the state. We don’t need radical national health care reform to solve this problem. The states can do it themselves, if they stand up to the special interests that demanded these additions in the first place.

The 7 million hardcore uninsured Americans (2.4% of the population) either don’t have access to insurance on any basis or couldn’t afford it even if the states were more reasonable about mandates. If this were the only problem in health care, it could be readily resolved by a judicious expansion of existing government health programs that already cover well over 100 million people.

Unfortunately, our dysfunctional health care system suffers from much deeper problems, including rapidly escalating and uncontrolled costs; unreliable quality that is killing more than 300,000 Americans every year; a looming pandemic of preventable diseases of people who refuse to live healthy lifestyles; and the uninsured. Any attempt to reform health care that deals only with the uninsured--without simultaneously addressing these larger issues--will be like replacing a leaky faucet on the Titanic.

There is a way to fix these problems, but it won’t come from any of the proposals you’ve seen coming from presidential candidates, congressmen, newspaper columnists, or any of the other reform proposals you’ve seen to date.

Copyright 2008 by Stephen S. S. Hyde. All rights reserved. Quotation of excerpts permitted with attribution.

Myth #1: Everyone must have health insurance.

A NY Times article last week reported that "Democrats and Republicans appeared to agree on this much: All Americans should be insured.” Alas, both parties are wrong. The requirement for universal health insurance as a condition of effective health care reform is a myth.

It is not necessary that every American be insured, only that everyone have access to available, affordable, portable health insurance in a way that avoids the risk of adverse selection.

There are numerous reasons why people may rationally decide not to purchase health insurance. Here's a baker’s dozen:

1. Their religious beliefs lead them to shun modern medicine (like Christian Scientists) or health insurance (like the Amish).
2. They have sufficient personal resources not to need it; particularly if they are savvy enough to negotiate prices and even shop overseas for much lower cost health care.
3. They believe that alternative medicine, lifestyles, and therapies are a better option, and they have no truck with conventional allopathic medicine.
4. They’re principled live-free-or-die libertarians who thumb their noses at governmental, nanny state, you-have-to-do-it-because-it’s-good-for-you mandates, and they are willing to live with the consequences, including being denied care if they can't pay for it.
5. They value their privacy and don’t believe that the government or their employers should know their health status or history.
6. As in Massachusetts, mandatory insurance purchases would need to allow exemptions, thus requiring people to divulge private information on such personal issues as lack of adequate income, evictions, disaster losses, and utility shutoffs. Anyone failing to successfully petition the government would be subject to financial penalties. This in unjust.
7. Many don’t like the limited choice of health benefits offered by their employers or the government, and want to decide for themselves what they will buy and how much they will pay to get it.
8. Even for people who can afford it, a mandated plan may not be worth its price. That is certainly the case for many young employees who are discriminated against by their employers’ community rating of employee contributions, thus forcing them to subsidize their older co-workers who usually make more money.
9. Many things can be more important than having health insurance, such as food, housing, heat, a job, and reliable transportation. People should be free to choose how they spend their money.
10. The government has never required the purchase of a privately sold good or service as a condition of American residence. (No, car insurance is not an exception.) Nor should they now.
11. Many people will validly object to being forced to financially support an inefficient, but often immensely profitable, health care delivery system.
12. If one's health insurance premiums continue to rise faster than one's income (as they have for the past 40 years), then no matter how inexpensive government-mandated insurance may be initially, it will eventually become unaffordable. Why should people have to support that?
13. Mandates are unconstitutional on the basis of taxation without representation, a violation of the takings clause of the Fifth Amendment, and lack of due process.

The best argument against mandates is that they are not necessary. The trick is to make universally available health insurance voluntary, but without letting people game the system by opting out when they're healthy and then buying in when they're sick. Such behavior creates adverse selection that will render any health insurance system unsustainable. Fortunately, that's not hard to fix. It just requires the use of strictly limited open enrollment periods and punitive late enrollment penalties. Nothing else. If you’re interested, I’ll describe how that could work in a later posting.

Copyright 2008 by Stephen S. S. Hyde. All rights reserved. Quotation of excerpts permitted with attribution.