Thursday, August 20, 2009

Employer Paid Health Care is Bad for You

The "debate" on health care has been really disenheartening lately. Between the Death Panels on one hand and gun toting knuckleheads lately, it seems that intelligent debate about the actual economics of the issues have been lost on most people. One idea that keeps coming up is that most people are happy with their employee provided health care coverage.

Nonsense. Most people aren't really thinking about what "employer paid" really means.

Employers do not pay for anything of yours. Employers (I say this as a former small business owner and employer) look at the total cost of the employee and balance that against their value. We seek to find ways to minimize our cost while simultaneously "giving" the employee something that they will highly value. If you're worth $100, we'll pay you $100; but we'd rather pay you $70, and buy you something that costs us $20 but you think is worth $40. In that example, you then cost us $90 but you feel like you're getting $110.

In other words, the money that employers pay for your health coverage is just part of your overall compensation. It's your money. You'd be better off with the cash, if you had the ability to purchase that same coverage via a large group plan. If that were the case, you could very easily compare the economics of different job offers, without having to guess at the value of different health care coverage plans. You'd also be able to switch jobs or start a new business without worrying about losing your coverage because it would be yours.

This is basically the argument that McCain made during the campaign. He wanted to transfer the tax benefit from the employer to the employee through a refundable tax credit. If he had added a mandate for coverage, some strong regulation about the coverage and subsidies for those who couldn't afford coverage, he'd have had a great idea.

But back to why Employer Paid is bad for you. It's bad because it gives power to the employer at the expense of the employee. If you like your coverage and that coverage is not available to you on the individual market (basically because you might actually need it), then you're stuck. Not surprisingly, this is one reason why many employers do like it. Also, it favors large employers (who have bargaining power and therefore get better pricing) over small businesses (which are basically treated like individuals). Unless of course those large employers made health care based promises that they can't meet (e.g. the auto companies).

Also, it's bad because it creates a disincentive to hiring any but the youngest and healthiest employees. Now before you go saying something like "that's illegal" consider yourself in the following situation. You own a small business. You have 10 employees, one of whom has given notice so you have to replace him. You have narrowed your search down to two candidates: a young healthy looking guy and a guy who looks healthy but also seems to be about 50 and mentioned something about diabetes. The two guys are asking for the same salary, and are both equally qualified for the job.

Some additional facts: you know that your insurance policy does an annual "census" where they ask you the ages and zip codes of your employees. That determines the rates for the entire company. So if you hire a bunch of 50 somethings, your rates go way up, twentysomethings, your rates go down (or don't go up as fast). Also remember that as the owner of this business, your "pay" is simply what is left over after everything else is paid. So every dollar in extra expense is a dollar that you don't have in your pocket. Also, it is possible that your rates could go up far enough that you can't afford to cover any employees, including yourself (and your family).

So tell me... which employee do you pick?