March 11, 1994
"The Truth About Who Pays"
San Jose Mercury News
By Timothy Taylor
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IT'S NO particular secret that even when an employer pays for employee health insurance, workers end up footing the bill by receiving lower wages.

President Clinton's own Council of Economic Advisers agrees. In the "Economic Report of the President" released last month, the council spells it out: "Economic theory suggests that most of the increase in health care costs will be reflected in lower wages."

The reasoning is straightforward. Market forces determine the amount of compensation that employers need to pay to various workers, but companies don't much care whether they pay out that amount as take-home pay, or as a benefit like health insurance. But when companies pay more for employee health insurance, they have less money available for salary increases.

The explanation of the Clinton administration economists continues: "Empirical research suggests that the dominant long-run response of businesses to rising health care costs has indeed been to lower the rate of increase of workers' wages. Between 80 and 100 percent of increases in health care spending appears to be reflected in lower wages."

Of course, just because the point is obvious to Clinton's top economic advisers doesn't mean that either supporters or opponents of the Clinton health plan are paying attention.

For example, the Clinton health plan proposes that employers should pay 80 percent of the health care cost, while employees pay the remaining 20 percent. Opponents of the plan have argued for a different split, like having employers and employees pay half each.

This dispute is as pointless as arguing whether you should pay the dinner check with cash out of your wallet or cash out of your pocket. Either workers pay directly, or they pay indirectly through lower take-home wages. But regardless of whether employers sign the checks for 50, 80, or 100 percent of health insurance coverage, it's workers who end up paying.

Another unproductive argument concerns having small business pay less for health insurance. The Clinton administration plan guarantees that firms over 75 workers would pay no more than 7.9 percent of payroll for health insurance premiums, while a firm of less than 25 workers who are paid an average wage of less than $12,000 would pay no more than 3.5 percent of payroll for health insurance.

Of course, such a sliding scale would cause problems. It means taxpayers will have to subsidize health insurance for employees of small business. Moreover, it provides an incentive for a large business to fire its low-paid workers (janitors, food service, and so on), set them up as a small separate company, and then to hire them back -- because as a small business of low-paid workers, they would become eligible for federal health insurance subsidies. But these special provisions for small firms miss the point in a more basic way. Repeat after me, one more time: Even if a business signs the check for health insurance, workers are the ones who actually pay.

The Clinton plan may sound as if it is proposing that small business should pay less than large business; what it's actually saying is that employees of small businesses should pay less for health insurance than employees of large businesses, which makes no sense at all. There's no reason that what you pay for health insurance should depend on the size of the company you work for, or on the average level of wages at that company.

One alternative now kicking around Congress is that large firms might be required to sign the checks for employee health insurance, while employees of small firms might be required to buy their own insurance, if their company doesn't pay for it. The powerful head of the Senate Finance Committee, Senator Daniel Patrick Moynihan, suggested the likelihood of a plan along these lines on "Face the Nation" last weekend.

A sensible health care reform might take this idea one step further, and mandate that every household be responsible for having its own health insurance.

In such a scheme, many employers would continue to pay for employee health insurance, both because employees would want it that way, and because it's easier for a single employer to negotiate the details of health insurance coverage than for hundreds of employees to negotiate on their own. That would be fine; having your employer provide health insurance (and pay correspondingly lower wages) would meet the individual mandate.

For others, government would also need to assist in setting up health insurance purchasing alliances to assure fundamental meat-and-potatoes insurance to small businesses and individual households. Government subsidies on a sliding scale would be necessary for poor and near-poor households.

It's time to surrender the delusion that "employers pay" for health insurance. That wrong-headed starting point leads only to confusion and irrelevancy. The health policy debate should simply admit that people pay for health insurance, one way or another, and focus on figuring out how to design and finance a reform in which every household has basic coverage.

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