Wednesday, November 18, 2009

Jeffrey Flier, Dean of the Harvard Medical School, like so many other people, makes a mistake when he claims that employer provided health care enjoys tax advantages that result in overinsurance and higher costs.

Let's think about this in common sense terms. An employer is going to provide compensation to workers only up to an amount where his employees are satisfied. The compensation will consist of a combination of salary and other benefits such as vacation time, retirement plan contributions, medical insurance, free coffee, etc.

Most of the other benefits will have a cost to the employer that gets factored into the employer-employee arrangement. The employee will appreciate only those benefits that provide him with a desired benefit. To the extent that the employee doesn't use or feel a need for a certain benefit, the employee will discount its value to him. Since there is a cost to the employer of providing these benefits, the employer isn't getting his money's worth if any of these benefits don't generate employee satisfaction (in ordinary English, the boss ain't going to pay for something if there's nothing in it for him).

Employees do like getting medical insurance as part of their compensation package. But they're not going to appreciate a package that provides them with more coverage than they feel they need. And since it costs more to provide additional coverage, if the boss doesn't think the employees are going to value the added coverage, then the boss isn't going to provide that coverage, he'll take that money and spend it on something else that he thinks his employees will appreciate.

Thus, there is no incentive for the employer to provide too much insurance to employees, with 'too much' being defined as more insurance than the employee thinks he or she will use (for example, providing nursing home care benefits to a workforce comprised of teenagers isn't going to go over very well and thus isn't likely to be contained in such a package).

And neither is there an incentive for the employee to demand more coverage than they think appropriate. Most employers insist that employees bear at least some of the cost of medical insurance coverage. In most cases, the higher the coverage, the higher the cost to the employee so this would discourage employees from demanding coverage in excess of the amount they thought necessary. And even if employees in a particular situation didn't have to pay more, since everybody knows medical coverage is expensive, they'd be silly if they asked their employer to spend dollars on coverage they didn't need instead of spending on something more to their liking.

So where is the incentive for employers to provide their employees with unnecessary coverage? There isn't one.

And as far as the tax advantages of employer provided health care, the employer is ambivalent, he gets no more of a deduction for providing health care than he would if he paid the same amount out in straight salary. And while it is cheaper for an employee to receive employer provided health care coverage than to buy it himself, as I pointed out above, there is no incentive for the employee to ask for more than he thinks necessary. No more coverage, no less coverage, just the right amount.

And there is one final common sense repudiation of the claim that employers provide too much coverage to their employees.... for all of you who get coverage through your employers, how many of you feel you're getting too much? What's that, none of you do? I thought so.