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How can it be the case that, in the words of the White House, “skyrocketing co-pays and deductibles and soaring insurance premiums are crushing small businesses?”

Readers may find themselves asking a question that I believe the President is assuming, “how can it NOT be the case?” It does sound so appealing. And it also violates the most basic premises in all of economics – that systems tend toward equilibrium, and that as a result, firms (without the protection of 3rd parties) must pay their workers what they are worth (no more, no less) – and this is not because of some moral obligation on the part of firms, it is the nature of competition that forces them to do so.

Why does this matter?

Leaving tax considerations aside, firms care only about the total amount of compensation that they must pay to attract and retain their workers. Like nitrogen from the air is no different than nitrogen in cow-dung, $100 in the form of cash paid out as salary is the same thing as $100 in health insurance premiums purchased on behalf of your workers. Let us ask a few simple questions.

  1. Do rising health care expenses make workers more productive?
  2. Do rising health care expenses force employers to pay their workers more?
  3. Do employers have options about how to structure their workers’ compensation packages?

The answer to one is highly likely to be no. In this case, it does not make sense for employers to continue to offer health insurance benefits if those expenditures increase faster than worker productivity. The answer to two is also no. Absent governments forcing firms to do so (and that would never happen, would it) firms are free to offer the same subsidy for health insurance as they did the prior year, or are free to increase or decrease their contributions. Just because premiums rise by 10 percent does not mean firms need to pay workers in this form of compensation by 10 percent or more. The answer to three is yes. The only way that rising health care costs could be crushing firms is if they are forced to pay their workers compensation in the form of health care rather than in the form of salaries and if worker productivity is not increasing as fast as health care costs. If either of these two are not true, there really is little logical case the elites can make – though they continue to do any and everything to get the government involved in the health care business more than that are already.

Funny thing is, the elites running around the White House and the Capitol never think of the implications of this worldview. High health-care costs can only be crushing firms if they are somehow paying these things to workers – it is tautological, no? Then, how in the next breath, can these elites be claiming that workers are no better off today than they were 10 or 20 or 30 years ago? Really, if health care costs are going up in real terms by five percent per year or even higher, then it must be the case that the compensation of workers is going up by that much as well (for these costs to be “crushing” to firms) – which is to say, that they have been rewarded rather handsomely by the “free” labor markets since the Reagan revolution. You can’t have it both ways folks. Either firms are being crushed AND workers are much better off, or firms are not being crushed and workers perhaps are not better off. Note that firms not being crushed and workers also being better off are not mutually exclusive outcomes.

One Response to “Crushing Health Care Costs”

  1. Chris Gerrib says:

    As a manager in a small-ish business, what’s happening is that we are paying some of the increase in health insurance costs (to prevent our workers from walking out the door) but trying to hold the line on salaries.

    The result is that the employees see take-home pay going stagnant (small raise minus big health care increase) AND our health costs per employee go up.

    In our industry (banking) dropping health insurance is not an option – many of our lower-paid employees need coverage more than a paycheck, and every other bank in town offers coverage.

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