The Daily Caller

The Daily Caller

Workers, not employers, bear the (full) cost of health benefits

Michael F. Cannon
Director of Health Policy Studies, Cato Institute

The Kaiser Family Foundation recently issued its annual survey of employer-sponsored health benefits, declaring: “Family Health Premiums Rise 3 Percent to $13,770 in 2010, But Workers’ Share Jumps 14 Percent as Firms Shift Cost Burden.” That’s half-right — but the other half perpetuates a myth about employee health benefits that stands in the way of real health care reform.

Many workers believe they pay one part of their health insurance premium — say, $4,000 — and their employer pays the rest.  But that’s not how it works.  When your employer “contributes” the other $9,770 toward your premium, the money doesn’t come out of company profits.  It comes out of your wages.

The Congressional Budget Office explains: “When an employer offers to pay for health insurance, it pays less in wages and other forms of compensation than it otherwise would, keeping total compensation about the same.”  MIT health economist and Obama advisor Jonathan Gruber writes in the Handbook of Health Economics that economic research yields “a fairly uniform result: the costs of health insurance are fully shifted to wages.”  In a recent survey, more health economists agreed on this issue — 91 percent — than on any other question posed.

In other words, you pay the full cost of your health benefits: partly through an explicit $4,000 premium and partly because your wages are $9,770 lower than they otherwise would be.

Kaiser therefore claims the impossible when it says that firms are shifting costs to workers.  Employers cannot shift to workers a cost that workers already bear.  Yet this year, as in past years, the Associated Press, Bloomberg, CNN, Kaiser Health News, The Los Angeles Times, The New York Times, NPR, The Wall Street Journal, and The Washington Post uncritically repeated the cost-shifting myth.

Gary Claxton, the Kaiser vice president who directs the survey, defends their interpretation.  Economists agree that workers bear these costs in the long run, he says, but not necessarily in the short run — and the “employee share” of premiums reached a new high in 2010, while the nominal “employer contribution” remained constant.  “I think the way we talk about it is the way most people think about it and experience it,” he says.

Short-run exceptions to the rule are possible under certain conditions.  But Kaiser doesn’t bother trying to establish whether capital and labor markets are correcting a combination of below-equilibrium profits and above-equilibrium labor costs.  Year after year, Kaiser reports that employers bear the lion’s share of the cost of health benefits, and any increase in the “employee share” is a cost-shift.

Kaiser even claims that employers shift “the costs of health insurance to workers through [higher] deductibles and other cost-sharing.”  But increasing deductibles and coinsurance does not shift health insurance costs; it reduces the amount of insurance.  That shifts the cost of health care — from all members of the insurance pool to individual members, not from employers to workers.

Kaiser’s embrace of this myth clouds how it interprets changes in health benefits.  Kaiser president Drew Altman warns that “shifting the costs to workers during a terrible economy is bad news for working people…it means added economic insecurity.”

  • Pingback: Independence Institute: Patient Power Now » Blog Archive » Workers, not employers, bear the (full) cost of health benefits

  • righthere

    As a small business owner in Southern California, I can tell you my experience. Until the recent collapse, over the last 25 years in this labor market for my firm to attract truly skilled, dedicated retainable workers has been such that wages and benefits needed to be at the top of the market.

    The notion that the hundreds of thousands of annual dollars, paid by me, in employee health care premiums was somehow ‘stolen’ or withheld wages is so absurd as to defy words.

    Perhaps the author should try putting his money where his mouth is, start a business finally sign the check on the front rather than the back. Only then will I listen to his tripe

    • Pabloinrio

      Ahmen to that.

    • gregbo

      The point is not that employers are stealing the cost of benefits from employees, it is that employees have to earn their compensation, in whatever form, through their labor. As a small business owner of 19 years I will tell you I’d rather give the health insurance premiums, unemployment taxes, workman’s comp premiums, 7.65% payroll taxes and all other mandated costs of employment directly to the employees. They’d get a huge raise and it wouldn’t affect the company bottom line one whit. It’s money they’ve earned.
      I don’t care if I write a check to the U.S. Treasury, an insurance company or to the employee directly, my bottom line looks the same either way. But generations of mandated employer obligations to third parties has led to a fundamental misunderstanding on the part of wage earners about basic economics. There is no such thing as a free lunch or free health insurance.

    • Buckoux

      You miss the point, “righthere”. Read “gregbo’s” reply, below, and become enlightened.

      • Buckoux

        Better make that “above”, Buckoux.