Some Simple Economics of Mandated Benefits

by on July 2, 2009 at 3:19 pm in Medicine | Permalink

Via MR commentator John Chilton, here is a link (JSTOR, but free pdf here) to the classic and excellent treatment by Lawrence Summers on mandated benefits.  My view is that the main case for mandated benefits is simply to note that public provision is often worse and that direct subsidy, such as a cash transfer, is not always feasible.

The case against is simple too.  Say that previously unprovided health insurance would have cost the employer 60 and would have been valued by the worker at 40.  You're imposing a tax of 20 on the employment relation.  In the short run firms will hire less labor and during a recession is an especially bad time to produce that effect. 

In the longer run, if the market is competitive, wages will fall by 20.  We're forcing relatively poor workers to consume more medical insurance, and more medical care, than they wish to, at the expense of their cash income.

Do not forget the excellent words of Ezra Klein:

Indeed, the main impact of health-care
reform on health may be that if it could contain costs, we'd have money
to spend on things that actually do make us healthier.

He means things other than health care in the narrow sense.  I don't know if Ezra opposes the mandates approach (compared to what?) but his quotation indicates a problem with it, even from the standpoint of health alone, much less considering the other pleasures of spending or saving cash.

Of course some of the people covered by the mandate would otherwise end up showing up at emergency rooms.  Treating them that way would get tacked on to my medical bills, one way or another.  With a mandate they are no longer my financial headache. 

With this new change, who's better off?  Me.  Who's worse off?  The previously uninsured poor person.

You might say: "We are covering more people, at a lower price, than we had thought possible."  That sounds like a kind of triumph.  But if you cut through to the actual analysis, your paternalism has to be a lot stronger than your egalitarianism for you to support this kind of measure.

Mark July 2, 2009 at 3:51 pm

“In the longer run, if the market is competitive, wages will fall by 20. We’re forcing relatively poor workers to consume more medical insurance, and more medical care, than they wish to, at the expense of their cash income.”

I’m not sure how important the mandate is besides the impact on the CBO analysis.

Workers at smaller business certainly value their health to some degree and would purchase insurance at some price. At a small business currently that price is very high compared to employees of large employers. I will speculate that many uninsured small business employees would purchase health insurance if they were offered similar premium rates to those working at large businesses. The exchange will hopefully do just that but I suspect the CBO would have a hard time determining what price the uninsured are willing to pay for health insurance.

Anonymous July 2, 2009 at 4:00 pm

All the economic logic is correct.

But here in Israel, the medical treatment is simply better than in the US — competition among providers, less bureaucracy, tiny deductibles, medication coverage, immediate access to MD’s for non-emergency care, and responsive major treatment coverage.

Because it is funded through a 10% tax on income, however, this care is more expensive for high earners than it would be in the US.

John B. Chilton July 2, 2009 at 4:10 pm

“Of course some of the people covered by the mandate would otherwise end up showing up at emergency rooms. Treating them that way would get tacked on to my medical bills, one way or another. With a mandate they are no longer my financial headache.”

Yesterday or the day before NPR All Things Considered interviewed a doctor who gave the example of an uninsured patient who chose to economize by quitting her blood pressure meds. She ended up hospitalized at great cost. The example is meant to illustrate that if she’d been insured she’d have made better decisions in the sense of lowering the overall cost of her care. (That’s what Obama keeps asserting as well when he repeats his diabetes example.) In short, it’s at least conceivable everyone could be made better off — although probably not without some direct subsidy of health insurance.

By the way, consider also auto liability insurance mandates. If there’s a state that doesn’t have one, I don’t know about it. The trouble is enforcement — the poor often don’t obey the mandate. Here’s an example of a mandate that’s clearly not egalitarian.

Brian J July 2, 2009 at 4:32 pm

Nobody is claiming this would be free. If a person’s income is 20 percent lower but he has medical care he would otherwise not be able to afford since he would be priced out of the market, isn’t that a possibly great outcome? Of course if he doesn’t want it, that’s a problem, but I doubt that constitutes a majority of cases.

DanC July 2, 2009 at 5:07 pm

Depends on how sticky wages are.

Plus, if wages fall too low, and 20% may tip things, people may just prefer welfare. They get government benefits under welfare and the marginal benefit of working (income) is falling. Granted some people may work that might not have if they had lost medicaid.

Others may see an increase in the underground economy. Low skilled workers may find more work off the books, outside of social security and all taxes. These people would still populate the ER.

The notion that preventative care will reduce health care costs is wrong, We are all mortal. We all get sick and die. Unless you want to say that we will just stop looking for cures for people past a certain age or with certain diseases. Good luck selling that.

Something like roughly 15% of people without health insurance make over $50,000 a year. Who are the uninsured and why are they uninsured.

For two income families, they could lose. Spousal coverage could be eliminated at many firms or the newly insured spouse will see a cut in pay (to pay for insurance) and the other spouse’s insurance will demand that medical bills be jointly paid. On net they lose. I wonder how many WalMart employees fall into this group. i.e. having a partner who currently lacks insurance through their employer but is covered by a WalMart partner?

The government is seeking to mandate how workers are compensated. I’m not sure they have the ability to make those decisions effectively. Once they get more involved, what are the limits? Once you have the bureaucracy in place who will be it’s master?

Allan July 2, 2009 at 5:19 pm

One of the main problems with the current system is that it inhibits transferring jobs. It used to be that pensions discouraged movement. Then we got 401(k)s (not that the current system is better, just that it is more portable).

Either no jobs should offer health insurance, or all jobs should. Perhaps a system where insurance is tied to the individual, not the job, would be better. If that were the case, businesses would have 0 incremental health care costs per employee. I would think it would be a net benefit.

As for the 60/40/20 argument, why do you assume those numbers? What if they are 30/40/10(the other way)?

Walt French July 2, 2009 at 5:49 pm

…health insurance would have cost the employer 60 and would have been valued by the worker at 40.

Yeah, it’s certainly possible. But employers started competing on non-wage benefits under Nixon’s wage controls, and the health care benefits are pre-tax. If I, as an individual, face no excess costs because insurers need zero extra time to set a fair, no-moral-hazard premium on a stranger who’s looking for insurance (hah!), I’m still buying my personal insurance with after-tax dollars. (And no, the medical expense deduction is irrelevant for — what? the huge majority? — of Americans.)

Then there’s the minor issue that sooo many Americans assume they live charmed lives, and don’t think they need coverage, until faced with a bankrupting incident. Very frequently? What are the stats: 75% of mortgage foreclosures, to apparently “established” Americans, due to uninsured medical costs? These individuals may retrospectively value that insurance at 500.

So it’s more like costing the employer 60, and available in the “free” market to individuals for 120. Or at 1000.

mulp July 2, 2009 at 6:25 pm

The notion that preventative care will reduce health care costs is wrong, We are all mortal. We all get sick and die. Unless you want to say that we will just stop looking for cures for people past a certain age or with certain diseases. Good luck selling that.

The cost analysis of treating hypertension shows it offers positive returns. Ditto diabetes. My dad had a doctor who was one of the early advocates, perhaps because his dad died prematurely from some hearth problem, so he was started on barbiturates to lower blood pressure. At the time, no one knew what caused hypertension or why it caused higher death rates, but the early results of lowering blood pressure by any means drove more and more research and more aggressive treatment. The evidence supporting treating high blood pressure showed a clear positive return for this even when the recommended drugs were still under patent and rather expensive. Of course, the drug companies emphasized the studies using their patented drugs, so the benefits of the unpatented and extremely cheap diuretics weren’t included in studies. Independent studies have shown them to be even more cost effective, and now with all classes of hypertension treatment now available as generics, the benefits are even larger.

Again, no one quite understands what is being treated; lots of hypothesis, but the causality link between high blood pressure and premature death is not well established.

So, hypertension is not a disease; it is a symptom of something, apparently inherited at least in earlier generations, and likely inherited in many people today. “Lifestyle” doesn’t “cure” the symptom.

Hypertension is actually a great example of the benefits of evidence based care based on large population studies. My dad and myself before I was 40 became part of the evidence that just lowering blood pressure leads statistically to longer, more productive lives.

The same is true of diabetes. Diabetes statistics argues a case for a broader view of health care.

Arguing “take responsibility for your lifestyle choices” is a bit problematic when you look at diabetes. Take the young adult who testing shows has diabetes. The best he can do at that point is manage his diabetes, and this is not a simple task. In many cases, this can be done by “lifestyle” but he is required to live a lifestyle that those over the age of 40 today didn’t have to live.

Why?

Well, the lifestyle of the child was what is correlated with the young adult having diabetes. But we don’t consider the child to be responsible for determining his lifestyle as a child. So, the young adult has inherited diabetes from his parents lifestyle choices.

In fact, I’ve seen studies that suggest that the tendency to diabetes is inherited in the epigenome so that a child raised with too much of the wrong foods will develop epigenome passed to the child which will act on the child from birth to effect the changes that took two decades for the mother.

Treating the cause of diabetes by reversing the trends to high salt, high sugar, high fat foods in the diets of children alone is likely to offer huge payoffs. After all, that’s the biggest change in diets between my grandfather, father, my, my niece, and grand niece’s childhoods.

And I won’t even mention small pox, polio, mumps, measles, …. vaccinations or water supply and sewage management as health care that has positive returns on investment.

Will McLean July 2, 2009 at 8:32 pm

I have a modest proposal: count the cost of employer provided health benefits the same as cash compensation for the purpose of satisfying minimum wage requirements.

Brian July 2, 2009 at 11:37 pm

There is a still simpler case against: the Declaration of Independence.

The simple idea expressed by this document was that each man should be considered as owning himself. A very basic economic concept that is either true or not. If not than all men are slaves and we should accept that safety and certainty. If so our policy must be to communicate that truth so that justice will prevail.

Happy Indepencence Day!!

Ricardo July 3, 2009 at 2:37 am

Suppose someone values insurance at 40, would have to pay 100 to get it by himself on the market and his employer would have to pay 45. If the mandate lowers the cost of employer-provided coverage though elimination of adverse selection to less than 40, that person benefits from the mandate. If the costs of coverage do not go down, then clearly uninsured people would not benefit (at least in a non-paternalistic way). But a big part of the argument for mandated coverage is that it will ultimately lower the cost of coverage for people who do not currently have health insurance.

Andrew July 3, 2009 at 5:05 am

“But a big part of the argument for mandated coverage is that it will ultimately lower the cost of coverage for people who do not currently have health insurance”

If that’s the argument, it’s a lie, or at least sold as a lie, if these particular words are technically true. They are trying to get the uninsured to pay for the medical services they DO GET at the emergency room.

So, what is the argument then? That the uninsured don’t get enough preventive care? But, ultimately, they want to reduce care to cut costs by (cross fingers) eliminating ineffective treatments. Tyler pointed out the irony in reducing costs by covering more people argument.

So, then, what argument is left? Eliminate the nonsensical tying of health insurance to employment? Nope. If they wanted to do that (honestly), they would have a revenue neutral tax on insurance benefits. As it is, taxing insurance benefits is just a tax increase.

Andrew July 3, 2009 at 5:45 am

As an aside, doesn’t anyone else get the feeling that politics could be defined as a method to maximize really bad decisions while minimizing contemplation?

I got that feeling on the micro level dealing with Robert’s Rules of Order, where for example no alternatives or priorities are compared, just yea or nay, and I get it now with the umpteen different versions of oddly named plans that even supporters don’t understand but have to pass yesterday.

Parke July 3, 2009 at 9:08 am

Wait a sec. “We’re forcing relatively poor workers to consume more medical insurance, and more medical care, than they wish to, at the expense of their cash income.” This ignores the fact that workers who do not consume medical insurance are not choosing to go without health care in a crisis, they are choosing to get free health care from an emergency room. It is rhetorically effective but wrong to compare “allowing liberty to workers” with “requiring workers to buy insurance” as if the workers were really going without health care in the former case.

John Dewey July 3, 2009 at 8:55 pm

mulp: “they probably don’t have insurance because they are denied insurance. And that is according to the insurance industry’s own research group.”

Do you know how the industry research group categorizes those receiving insuarnce through state high risk pools? These pools consist of persons initially denied individual coverage due to “uninsurable” conditions such as diabetes. About 35 states require health insurers to participate in high risk pools. Each state has its own formula for determining premiums, which are generally 150% TO 300% the average individual rate charged in the state.

All high risk pools have a waiting period, and a few also have waiting lists. So a portion of the uninsured are simply high risk consumers awaiting enrollment in the high risk pool program.

hibikir July 6, 2009 at 12:27 pm

Large companies aren’t even a panacea: Huge employers tend to have very large amounts of low paid workers, which leads to small amounts of employer contributions, and really weak benefits. How about a plan that doesn’t cover all hospital expenses, and has OOP maximums over 10K? Some of our largest retailers’ best insurance plans mean that a hospital stay will send the employee straight into bankruptcy.

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