Sunday, February 28, 2010

The Health Care Number You Didn't Hear

Real Clear Markets article "The Health Care Number You Didn't Hear" (February 26th, 2010) makes the argument that American workers do not pay for their health care because their employers pay. This is incorrect. While the article's point is quite correct, when people don't have to pay for services they will demand more of them, its point about employers paying for health care is wrong.

American health care fuses these two systems, but with a common economic flaw: people are overinsured, paying pennies directly on every dollar of health service they receive.

The end result: for every dollar spent on health care in the United States, just 12 cents comes out of the individuals' pockets. Imagine what food costs might be if your employer paid 88% of your grocery bill or what a trip to Saks might be like if your company covered the vast majority of the costs of the shopping spree.

Were employers to pay 88% of one's grocery bill, then one would expect one's wage to go down. The incidence of this tax on employers that refunds benefits to is likely to fall almost entirely on the individual. We could similarly imagine a world in which the government takes 50% of every person's paycheck and sends it back to them. Take-home wages would go down by half (and we would get a check from the government for 50%). Equilibrium wages would not change, and employers would not be paying for anything.

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