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You’re spending way more on your health benefits than you think


National Journal published a widely-shared article Thursday comparing premiums in the employer market to those in the individual market, exploring what would happen if employers dropped coverage.

Clara Ritger, the author, concludes that "for the vast majority of Americans, premium prices will be higher in the individual exchanges than what they're currently paying for employer sponsored benefits." 

I spent much of Thursday talking to a number of health economists who say that conclusion leaves out crucial information about how employers pay for health insurance–and what else they would do if coverage got cut.

Much of the research I've seen suggests that employers are unlikely to drop coverage en masse under the health-care law.

National Journal's analysis focuses on the light blue chunk at the bottom, employees might see deducted out of each paycheck. It ignores the really big contribution that employers pay and that economics research shows to come out of workers' wages.

That money doesn't come from nowhere; a lengthy body of economics research finds that the total premium, including employer and employee costs, come at the cost of workers' wages.

"The employees ultimately bear the full cost of of the health insurance plan they get form their employer," says Kate Baicker, a Harvard economist who served on President George W. Bush's Council of Economic Advisers from 2005 to 2007. "Even though they're only writing a check for a part of it, they're bearing the full cost."

This is known, in economics, as the wage-fringe tradeoff. Companies have a set amount they can spend compensating workers, the lowest amount they think they can pay without losing their workers to a competitor. They make these payments in wages and benefits. Any addition to one category will come out of the other.

"I think economists find this an uncontroversial concept," Baicker says.  "When you get a dollar more in wages, it has to come out of a benefit."

Baicker and Amitabh Chandra, another Harvard economist, co-authored a paper in the Journal of Labor Economics that found any 10 percent increase in health premiums "results in an offsetting decrease in wages of 2.3 percent."

"What we do know is that when health-care costs go up by a dollar, wages go down by a dollar," Chandra told me Thursday.

Or, if you prefer your analysis in chart form, here's what University of Pennsylvania's Zeke Emanuel and Stanford's Victor Fuchs published in the Journal of the American Medical Association.

When health-care cost growth slowed in the early 1990s, wages crept upwards. But as cost growth increased, wages stagnated. And, sure enough, when health costs grew at a slower rate in the mid-2000s, wages rebounded again.

"The health care cost–wage trade-off is confirmed by many economic studies," they write in an accompanying article. "Importantly, several studies show that when workers lose employer-provided health insurance, they actually receive pay increases equivalent to the insurance premium."

This last part might strike you as fishy. When, after all, do you read news about employers dropping insurance coverage accompanied by news of a great new raise? Baicker at Harvard will readily tell you its not as simple as a $100 cut in benefits leading to a $100 pay bump.

"The reason it's far from transparent for individuals is that it happens over time," Baicker says. "As each year's wage update comes out, or as people move across the jobs, it's happening. When health costs go up, it's hard to observe wages not necessarily going down, but going up less quickly."

Sometimes, cuts to benefits have impact in ways that are hard to notice. Chandra actually points out UPS as a great example in this arena. The company recently decided to stop covering its employees' spouses who can get coverage at their own workplace.

That policy, the company said, was a trade-off that allowed the company to keep premiums more affordable for its workers who stayed on the policy. "Limiting plan eligibility is one way to manage ongoing health care costs, now and into the future, so that we can continue to provide affordable coverage for our employees," the company wrote in a memo.

In other words, making a benefit package less robust had a pay-off: It became more affordable than it would have been otherwise. Because of a cut in benefits, there's likely a premium increase that didn't happen.

"If my employer stopped providing insurance, they'd have to start providing other benefits," Chandra says. "You really can't remain competitive without that."

This goes to the point at the top of this post: There's a reason why employers provide health benefits right now, even though they're so costly. Asking why employers would increase wages when they cut benefits, Baicker says, is like asking, "Why doesn't your employer pay you half of what they pay you right now? They don't do that because you'd leave."

Health premiums, by all accounts, are messy. They get even more complex when you start looking at who pays what percent, and how that changes when a wave of new regulations sweep into the marketplace. There will certainly be people who see their premiums go up, some will see them go down and others not much change at all.

Chandra, for his part, says he'd actually prefer it if his employer, Harvard, booted him onto the marketplace–and gave him the increase in wages that his research suggests he would receive.

"I'm paying for a super generous plan from Harvard right now in the form of lower wages," he says. "I could take a higher wage and spend some of it on a nice summer vacation."