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Employers can help fix American healthcare

Employer-funded healthcare in the US is an accidental system. It came into being during the second world war, when wage freezes and 1.9 per cent unemployment forced the government to allow companies to offer fringe benefits like healthcare in an attempt to attract workers.

In 1943, the Internal Revenue Service ruled that employer-based healthcare should be tax free — and we were off to the races. The percentage of the population in the US covered by employer-led plans rose from 9 per cent in the 1940s, to 70 per cent by the 1960s, according to economic historian Melissa Thomasson. It hovers around two-thirds today.

Yet tax advantages do not offset the fact that healthcare benefits are now the second or third-highest compensation costs for American employers, right after salaries, according to consultancy Mercer. Statistics from the OECD, the Paris-based club of mostly rich nations, show that healthcare in the US is the most expensive in the world by about 5 percentage points of gross domestic product (France is next, with much better outcomes). Which leaves me wondering why US multinationals are not agitating for nationalised healthcare?

It is a question well worth understanding for both economic and political reasons — the current bipartisan squabbles over the Republicans’ efforts to roll back Barack Obama’s Affordable Care Act threaten to derail President Donald Trump’s larger agenda (like it or not), just as it did his predecessor’s. Neither Obamacare nor the Republican plan really addresses the fundamental problem, which is that America has a healthcare market that is not anywhere close to what Adam Smith would have considered functional. It has almost no price transparency (you don’t get a bill until weeks or months after you’ve made treatment choices), is controlled by vested interests (doctors, pharmaceutical and insurance companies) who exert monopoly power against the businesses and consumers they are supposed to service, and is highly fragmented and inefficient.

All this contributes to the fact that the economic implications of rising health costs on not just individuals, but American business itself, have been poorly understood. In the 1950s, healthcare made up only 7 per cent of total worker compensation; today, it’s 20 per cent. Given that, it is no surprise that as healthcare costs in the US have gone up, wages have stagnated.

According to the Kaiser Family Foundation, employer costs for family health coverage went from $4,200 in 1999 to $12,600 in 2015. Wages were, of course, relatively flat during this period, and inequality grew rapidly. This happened for many reasons, but healthcare is one that doesn’t get nearly enough attention. Since it is part of overall compensation, basic economics tells us that as healthcare prices go up, wages will go down, and inequality will rise, especially since healthcare costs are a much lower percentage of a top earner’s salary than a lower income worker’s.

If you believe, as I do, that flat wages are a big part of the story of lower economic trend growth in the US, this is troubling — not just for individual citizens but for businesses that have to worry about both the absolute costs they are shouldering, as well as the consumption and growth-dampening effect of offloading an increasing amount of those costs to individuals who are less and less able to cope with them. This is a point illustrated not only by projections from the non-partisan Congressional Budget Office that the new Republican plan would leave 24m more Americans without insurance, but by the fact that many more people have been opting for cheaper but very high deductible plans over the past few years.

People who have to pay a lot more for basic middle-class privileges like healthcare are indeed going to buy fewer iPhones, upending Republican representative Jason Chaffetz’s flippant comment about supposedly inappropriate spending decisions by US families. They are also more likely to end up on public assistance, something that worries both liberals and conservatives.

“If people don’t have adequate access to health insurance, there’s a good possibility they are going to fall down the economic ladder,” says James C Capretta, who holds the Milton Friedman chair at the American Enterprise Institute. “The system would work a lot better if all of us could put pressure on doctors and insurance companies to provide more transparency.”

Indeed, the private sector is beginning to do just that. It is not the Trump administration but companies themselves that are disrupting the healthcare status quo. A crop of start-ups that aim to create more data transparency around things like hospital pricing and outcomes have sprung up in Silicon Valley. According to a survey by Mercer, 29 per cent of big businesses are now using price comparison software, up from 15 per cent two years ago.

A group of 20 large employers came together recently to create the Health Transformation Alliance, to use the purchasing power represented by their 4m employees (more than many US states) to negotiate better deals with insurers and drug companies. It is not socialised medicine, which is still an ideological leap too far for US business. But it is a welcome disruption of the most dysfunctional market in America.

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Via FT