Will Employers and Employees Ever Come to Their Senses about

Rising Insurance Costs?

Mark V. Pauly

The University of Pennsylvania

The Argument

• Some reactions to rising insurance premiums make (economic) sense and some do not. There are worse things than rising costs.

• Employers and employees are seeming to have both types of reactions, sensible and nonsensical.

• There are public policies that would help yield more of the former and less of the latter.

What Seems to Be Happening

• Back to business as usual: insurance premiums outrun compensation and productivity (?) growth.

• Employers not reducing offering, but are increasing cost sharing and premium sharing.

• Employees increasingly declining (any?) offered coverage.

• Uninsured ranks swelled by the non-near-poor.

Some Messages from Economics

• Employees pay for their benefits one way or another. THIS IS IMPORTANT!

• To employers: Increasing premium shares is probably worse (or no better) than reducing raises.

• Be careful about increased cost sharing.• To workers: Don’t decline coverage unless the

premium you pay is much higher than the benefits you expect to get.

• Charity care isn’t that great.

Some Important Factoids

• For many workers, increasing worker premiums increases taxable income, given total compensation.

• And it drives workers to become uninsured: so how fit with employer objectives? Ask this!

• Very healthy workers might find group insurance a bad deal, especially if they are stoic when uninsured or can find terrific individual coverage.

• But unlikely that young workers get back average employer contribution. Pay Starbucks wage?

Confronting Irrationality

• If it is irrational to raise worker premium shares, why do employers do it?

• Myopic people in silos, “Everybody else is doing it,” heterogeneity of workforce.

• If it is irrational to drop coverage in the face of a small premium relative to benefits, why do workers do it?

• Misinformation, economic inertia.

Some Messages and Some Policies

• Maybe almost all of the employee “dropees” have already dropped.

• Maybe employers will respond to labor market competition when the economy recovers (since they have goofed before).

• Maybe more transparency/better information is a government job too.

My Messages for Policy

• Dealing with the uninsured through employer provided coverage is like pushing with a rope (a strong rope): You can’t push but you can pull. Are there ways of improving matching, reacting, and transparency? Drop the fig leaf; total compensation approach as public policy?

• Would greater tax neutrality help or hurt?• Can the political process come to terms with cost

and crowd-out/tax cuts?