April 18, 2021

Economic View: For Obamacare to Work, Everyone Must Be In

These may seem to be reasonable positions. But they are incompatible. That’s been shown by historical events, and it’s now being strikingly confirmed by recent experience in the emerging Obamacare insurance exchanges.

The crux of the matter is what economists call the adverse-selection problem. Uninsured people with pre-existing conditions often face tens or even hundreds of thousands of dollars in out-of-pocket medical costs annually. If insurers charged everyone the same rate, buying coverage would be far more attractive financially for people with chronic illnesses than for healthy people. And as healthy policyholders began dropping out of the insured pool, it would become increasingly composed of sick people, forcing insurers to raise their rates.

But higher rates make insurance even less attractive for healthy people, causing even more of them to drop out. Before long, coverage would become too expensive for almost everyone.

The adverse-selection problem explains why almost no countries leave health care provision to unregulated private insurance markets. It also predicts that requiring private insurance companies to charge the same rates to everyone will make it prohibitively expensive for most people to buy individual health insurance.

In the 1990s, lawmakers in New York State enacted just such a requirement, and the result was exactly as predicted. Rates for individual policies soared, making New Yorkers’ insurance among the most expensive in the nation. Now, rates quoted under the Obamacare exchanges place individual policies within reach for millions of New Yorkers. New York City residents who had been paying $1,000 a month for individual policies in the earlier environment, for example, will now be able to purchase similar coverage on the Obamacare exchanges for slightly more than $300 a month.

What’s changed? Insurers are able to offer more reasonable rates because the individual mandate — the requirement in Obamacare that everyone buy insurance or face financial penalties — is ensuring a high proportion of healthy people in the insured pool.

Early quotes for individual policies on the exchanges in several other states have exhibited a similar pattern. That’s true in California, for example, and in Maryland, the latest state to report, rates now compare favorably with those in employer group plans.

Despite this experience, many in Congress want to repeal the individual mandate. Some, such as Senator Marco Rubio of Florida, have even threatened to shut down the government unless Obamacare is repealed entirely.

What alternatives are there? One way of avoiding the adverse-selection problem would be to re-emphasize traditional employer-provided health plans. Adverse selection is less serious under such plans, because the favorable tax treatment they receive requires insurers to cover all employees irrespective of pre-existing conditions. (Insurers can meet the requirement because most people employed in any company are reasonably healthy.)

But Obamacare was enacted precisely because employer plans fell short in many other ways. Millions of people, for example, are ineligible for such plans because they don’t have jobs. And millions of others with chronic health problems are trapped in their current jobs, because leaving them would mean losing coverage.

Employer plans arose in the first place only because of a loophole created by wage controls during World War II. In an effort to curb the costs of the war effort, the government prohibited wage increases but, perhaps by oversight, did not prevent employers from offering additional fringe benefits as a way to combat labor shortages. Employer health plans proved an especially effective recruiting tool and had the additional advantage of not being taxed as implicit income.

BUT if universal access to health care is the goal, employer plans are not the solution. Because global competition has increased pressure to cut costs, the number of workers with such plans has been steadily declining for more than 40 years.

The challenge was to design a new system that could cover the more than 50 million Americans without health insurance. The Medicare-for-all proposal favored by many health economists was one approach that the administration considered.

But that approach would have required Americans to abandon their existing employer plans for something new and unfamiliar. In the light of survey evidence that most Americans were reasonably satisfied with their existing plans, it’s hard to second-guess President Obama’s conclusion that this step would have been politically infeasible.

The only remaining option was to supplement existing employer plans with regulated private insurance markets. This approach had been carried out successfully in Switzerland, and in Massachusetts under Mitt Romney when he was governor. Individual mandates were an essential ingredient of that strategy. And given that many people could not afford to purchase insurance, it was also necessary to include subsidies for low-income buyers.

Obamacare, in any event, is now the law of the land. Even its most ardent supporters concede that the program will need to be amended as experience accumulates. But evidence from the emerging insurance exchanges vindicates the basic policy choices underlying the legislation.

We must ask those who would repeal Obamacare how they propose to solve the adverse-selection problem. That problem is not an abstraction invented by economists to justify trampling individual liberties. As experience in most countries around the world has confirmed, it is a profound source of market failure that renders unregulated insurance markets a catastrophically ineffective way of providing access to health care.

Robert H. Frank is an economics professor at the Samuel Curtis Johnson Graduate School of Management at Cornell University.

Article source: http://www.nytimes.com/2013/08/04/business/for-obamacare-to-work-everyone-must-be-in.html?partner=rss&emc=rss

Economix Blog: Taxing Employers and Employees


Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

The delay of the Affordable Care Act’s employer mandate is a favorable development for the labor market, but the employer mandate is only the tip of the iceberg in terms of the labor-market distortions that the law has scheduled to come on line next year.

Today’s Economist

Perspectives from expert contributors.

The Affordable Care Act’s employer mandate will eventually levy a penalty on large employers that do not offer affordable health insurance to their full-time employees. The penalty is based on the number of full-time employees and adds about $3,000 to the annual cost of employing each person.

Employers have been complaining about the penalty, saying it will reduce the number of people they hire and cause them to reduce employee hours. Even economists and commentators supporting the law acknowledge that per-employee penalties reduce hiring by raising the cost of employment.

Economists have traditionally recognized that it hardly matters whether a tax is levied on employers or on employees, especially in the long run. In the employee-tax case, the employee pays the tax directly. In the employer-tax case, the employee pays the tax indirectly through reduced pay, because employer penalties reduce the willingness of employers to compete for people (Jonathan Gruber of the Massachusetts Institute of Technology has provided some good evidence in support of this widely accepted economic proposition).

Among other things, employment, employer costs and employee take-home pay would be essentially the same if the government levied a $3,000 fine on workers for having a full-time job with a large employer that does not offer health benefits, rather than levying the fine on employers on the basis of their full-time personnel, as the Affordable Care Act does.

But the political optics of the two policies are dramatically different. Large businesses can supposedly afford $3,000 per employee, while many employees could not afford another $3,000 bite out of their paychecks. Like it or not, economics’ equivalence results tells us employees will have to afford what amounts to a tax on them beginning in 2015, pursuant to the Treasury Department’s decision to begin collecting the employer penalty in that year.

For the purposes of understanding the state of the labor market, it doesn’t really matter whether individuals would be paying a tax for having a full-time job or receiving a subsidy for not having a full-time job. Either policy would reduce the gap between the income of full-time employees and everybody else. The ultimate result will be less full-time employment, in an amount commensurate with the size of the tax or subsidy.

The Affordable Care Act offers subsidies for people without work or in part-time positions that far exceed $3,000 per employee per year, which makes the employer mandate only a small piece of the law’s employment effects.

The law’s other new work-disincentive provisions, still on schedule for next year, include (i) a sliding income scale that sets premiums for people who buy health insurance on the new marketplaces, (ii) a plan for premium assistance that essentially resurrects the Recovery Act’s subsidy for what are known as Cobra benefits, allowing employees who have left a job to continue to participate, for a limited time, in their former employer’s health plan, in a more comprehensive form and (iii) hardship relief from the individual mandate.

As an example of these provisions, I explained last week how, even without the employer penalties, the premium assistance plan sharply penalizes full-time employment in favor of part-time employment. In combination, the provisions going into effect next year are two or three times larger than the employer mandate by itself, depending on the type of worker and the industry of employment.

Proponents of the Affordable Care Act, including a number of economists, have yet to acknowledge that so many provisions of the act have, from a labor economics perspective, so much in common with the employer mandate. But labor-market distortions are a common feature of several significant parts of the act and are an important part of what has happened in our labor market.

Whatever labor market benefits accrue from delaying the employer mandate could be had many times over by delaying the entire Affordable Care Act.

Article source: http://economix.blogs.nytimes.com/2013/07/10/taxing-employers-and-employees/?partner=rss&emc=rss

You’re the Boss Blog: Could Employers Use Immigrants to Avoid the Health Mandate?

The Agenda

How small-business issues are shaping politics and policy.

In a bid to win conservatives over to the cause of immigration reform, the authors of the Senate bill included a provision that would deny health benefits to illegal immigrants seeking to become legal. Now there is an argument making the rounds that this provision will encourage companies to replace American workers with those newly legalized immigrants.

The immigration reform bill that passed the Senate denies illegal immigrants who embark on the pathway to citizenship — the bill calls them registered provisional immigrants — access to the subsidies for purchasing health insurance available under the Affordable Care Act. Because the new law ties the penalties for employers who offer inadequate health insurance, or none at all, to the subsidies their workers receive, companies whose workers are ineligible for subsidies could avoid those penalties.

“Some employers would face no penalty for failing to provide such workers affordable health coverage,” Jed Graham, a reporter for Investor’s Business Daily, wrote in April. Mr. Graham called this “an incentive of up to $3,000 per year to hire a newly legalized immigrant over a U.S. citizen.” Under the bill, these immigrants would not be entitled to subsidies until they received a green card, which would take 10 years.

Investor’s Business Daily has been opposed to the health insurance overhaul, and ironically enough, this claim seems to have first been embraced by conservatives. But the argument has since made its way across the political spectrum: by June it cropped up in both the New Republic and Mother Jones. You’re The Boss readers repeated the claim in comments to a recent post about small businesses and immigration.

Here’s how it would work — and because the Affordable Care Act’s employer mandate, like everything else about the health care bill, is mind-numbingly complex, so, too, would be such a scheme to circumvent it by hiring newly legal immigrants. The recently postponed mandate, which applies to businesses with at least 50 employees, basically works two ways. (Feel free to consult this handy chart published by the Kaiser Family Foundation.) First, if a company offers no insurance at all, and at least one employee buys individual insurance with a government subsidy, the company must pay a penalty. The penalty equals the total number of employees minus 30 multiplied by $2,000. A company with 50 employees, for example, would pay $40,000. But if this company managed to make sure that all of its lower-paid employees — the subsidies are available to anybody making less than 400 percent of the federal poverty level — were registered provisional immigrants, it would avoid the penalty altogether, because none of them could buy subsidized insurance.

If, on the other hand, the company offers insurance but it does not meet the health law’s minimum standards, or some employees find it unaffordable, then employees are free to buy their own insurance. And for each employee who buys insurance with a taxpayer subsidy, the company must pay a $3,000 penalty — if 10 employees require subsidies, for example, the total penalty is $30,000. (This penalty is not as draconian as it might seem, because it is limited to the amount the company would pay if it offered no insurance at all.) So for every legal immigrant or citizen that a company offering sub-par health benefits replaced with a registered provisional immigrant, the company could save $3,000.

But how realistic is this? To skirt this law, the companies would have to out-and-out violate another: it is illegal to ask applicants about their immigration status — an employer can ask job candidates only if they are authorized to work in the United States.

And, frankly, it is a lot of effort. “Most employers want to focus on their business and not build these complicated schemes,” said Alan Cohen, the chief strategy officer and co-founder of Liazon, which offers employers group health insurance through what it calls a private benefits exchange. But companies that did try this scheme, he added, would enter “a house of cards that can come down on you at any time. And it’s not just the law itself. One little change in guidance and all of a sudden all that work you did, out the window.

“At the end of the day, offering employee benefits is all about attracting good employees. I think every business tries to attract and retain employees at some level. What’s going to happen is people are just not going to work for people who scheme to harm their employees.”

In any event, the prospect of employers ever having the opportunity to take advantage of these provisions seems increasingly remote. For one thing, not only has the administration delayed the effective date of the mandate for a year, but both conservatives and liberals have called for its repeal. And until House Republicans decide to take up the Senate bill, any discussion of registered provisional immigrants on a pathway to citizenship is going to remain academic.

Article source: http://boss.blogs.nytimes.com/2013/07/09/could-employers-use-immigrants-to-avoid-the-health-mandate/?partner=rss&emc=rss

Joblessness Shortens Lifespan of Least Educated White Women, Research Says

 The aim of the study, which is being published Thursday in The Journal of Health and Social Behavior, was to explain the growing gap in mortality between white women without a high school diploma and those with a high school diploma or more.

 The study found that the odds of dying for the least educated women were 37 percent greater than for their more educated peers in any given year in the period of 1997 to 2001. The odds had risen to 66 percent by the period of 2002 to 2006. The authors controlled for age.

The researchers used a health survey conducted by the National Center for Health Statistics, drawing on data from about 47,000 women ages 45 to 84. The study weighed more than a dozen factors to see which were causing the divergence in mortality rates. Poverty, obesity, homeownership, marital status and alcohol consumption were among the factors investigated.

 But they mattered little. As it turned out, smoking was important, as had long been established, but researchers were surprised that joblessness had a dramatic effect, even after controlling for factors that employment would have generated, like income and health insurance.

“What is it about employment that has this huge impact on mortality, beyond the material resources it brings?” said Jennifer Karas Montez, the study’s lead author, a researcher at the Harvard Center for Population and Development Studies.

 The study was an attempt to explain the reasons behind the troubling trend of declining life expectancy for the least educated Americans, particularly women. A study last year found that white women without a high school diploma lost five years of life expectancy between 1990 and 2008, a measure of decline last seen among Russians in the economic chaos that came after the fall of the Soviet Union. This year, researchers at the University of Wisconsin found that mortality for women had gone up in more than 40 percent of the counties in the United States since the early 1990s.

But the study raised more questions than it answered, in particular about why employment status affects physical health. Ms. Montez said there was some evidence that having a job offered intangible benefits that could improve health, including a sense of purpose and control in life, as well as providing networks that help to reduce social isolation.

One concern was that people who were not working were jobless because they were sick, but Ms. Montez said they did not find evidence for that.

 Sarah Damaske, an assistant professor of labor studies and employment relations and sociology at Pennsylvania State University, said women who were not in the labor force, a minority now compared to the 1950s, were more likely to have been disadvantaged from the outset, coming from family backgrounds and economic circumstances that tended to produce poorer health outcomes.

Article source: http://www.nytimes.com/2013/05/30/health/joblessness-shortens-lifespan-of-least-educated-white-women-research-says.html?partner=rss&emc=rss

She Owns It: The Challenges of Raising Prices and Competing With Online Retailers

She Owns It

Portraits of women entrepreneurs.

Jessica Johnson doesn't mind letting some customers go.Sara Krulwich/The New York Times Jessica Johnson doesn’t mind letting some customers go.

At the last She Owns It Business Group meeting, the owners talked about several issues related to pricing. This post focuses on the prices charged by the two family businesses in the group, and the particular challenges of selling a product that is sold online for less.

Deirdre Lord, who owns the Megawatt Hour, had a question for Jessica Johnson and Susan Parker. Both took over businesses handed down from their parents, and Ms. Lord wondered whether they inherited pricing schemes as well.

Ms. Johnson, who owns Johnson Security Bureau, said she inherited the terms on certain contracts that were not yet up for renewal. When she eventually approached at least one of those clients to discuss rate increases, the client protested that other companies offered to handle the job for less. As she has said previously, Ms. Johnson doesn’t mind letting that kind of customer go.

She said her more savvy clients understood that external factors affected pricing and they would incorporate rising costs into their contracts. “That’s the kind of business we prefer to go after now, as opposed to, ‘No, you signed the paper, you’re stuck with it forever,’” she said.

In light of the Affordable Care Act, which will require businesses with more than 50 employees to provide health insurance for those employees, these considerations will become even more important, said Ms. Johnson, whose company had more than 100 employees and had not previously offered health insurance. “I’ve been running the numbers for several of our contracts looking at what’s going to happen when health care kicks in next year,” she said, adding that she had been proactive about talking to clients about how her prices could be affected. “We can kind of set the table and let them know that a price increase may be coming and see if that means that they’ll stay with us or they’ll go to someone else.”

Ms. Parker owns Bari Jay, which manufactures bridesmaid and prom dresses. She’s the only owner in the group with a company that sells a product, not a service. When she and her sister took over Bari Jay, the prices of the dresses already on the market remained the same, she said. But soon after, their factories raised their prices, and they, in turn, raised theirs as well.

“I had no one to teach me how to price a dress, so I came up with my own formula,” she said.

“Is it working?” asked Beth Shaw, who owns YogaFit.

“Really well,” Ms. Parker said.

“Do you take your fixed costs and then do you divide that up by the number of units you sell a year?” Ms. Shaw asked.

“Yes, and then I add a margin on top of it,” Ms. Parker said. While stores have complained that her prices have gotten high, she said higher prices are a bridal-industry phenomenon. “Making a dress in China has gotten really expensive,” she said.

Like other bridal companies, Bari Jay sells a sample dress to its stores, which then place orders based on the sample. About 10 years ago, Ms. Parker said, many of Bari Jay’s competitors started giving away free samples. “My father tried it, and it almost put him out of business,” she said. So, instead, Bari Jay offers volume discounts.

“That’s a great idea,” said Alexandra Mayzler, owner of Thinking Caps Group.

“There’s an incentive to buy more dresses, and if you buy less than the minimum, then you’re going to pay full price,” Ms. Parker said.

“With pricing, you definitely have to do what Susan was saying: think about cost, all of the math, but then you have to say to yourself, ‘Who am I going to sell it to?’” Ms. Mayzler said. You have to determine what they expect and whether you’re willing to “deal with the relationships that come because you’re in a particular price bracket,” she continued.

Ms. Parker agreed and explained that she doesn’t rely exclusively on her formula. For example, if her formula demands that a certain dress be priced $10 more than another, but the lower-priced dress looks more expensive, she will “tweak” the prices accordingly. She also explained how price perception affects her business. Bari Jay sells to stores, which then sell to customers. “All of our stores pretty much adhere to M.S.R.P.,” she said, referring to the manufacturer’s suggested retail price.

But on the stores’ Web sites, it’s a different story. Customers buying online can get the same dresses for less, said Ms. Parker. But they don’t receive the services, like a fitting they would get at the physical store. When you buy online, Ms. Parker said, “They’ll send it to you in a ball and if it has a stain or damage, it’s on you.” This annoys the stores that carry Bari Jay but don’t sell online. And it bothers Ms. Parker and her sister. “It cheapens our name,” she said, adding that customers who are willing to pay more don’t want to wear a dress that someone else was able to buy for half the price.

You can follow Adriana Gardella on Twitter.

Article source: http://boss.blogs.nytimes.com/2013/05/28/the-challenges-of-raising-prices-and-competing-with-online-retailers/?partner=rss&emc=rss

Economix Blog: Casey B. Mulligan: Patterns of Health Insurance Changes


Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

A number of industries can expect big changes in employee health insurance in the next year or two, while others will continue with business as usual.

Today’s Economist

Perspectives from expert contributors.

Beginning next year, states and the federal government intend to create opportunities for families to purchase health insurance, separate from their employers, through insurance “exchanges” in the states. Insurers and the federal government will heavily advertise the new plans. Most important, middle- and low-income families may qualify for valuable federal subsidies that will serve to reduce premiums and out-of-pocket health costs.

To qualify for subsidized exchange plans, workers cannot be offered affordable insurance by their employers. Paradoxically, employers will create subsidy opportunities for their middle- and low-income employees whenever they fail to offer health insurance.

On the other hand, an employer dropping its health insurance next year will put its high-income employees in a tough spot, because they will have to buy insurance on their own without the tax advantages they had in the past by obtaining health insurance through their employer. As a result, employers with relatively many high-income employees will be under pressure to keep their insurance, whereas an employer of middle- and low-income employees may find them asking for health insurance to be dropped from the employee benefit menu.

Administrative costs, rising premiums and other costs have already made a number of employers lukewarm about health insurance, but they offered it in order to attract employees who do not care to be uninsured or to end up on Medicaid. The new insurance opportunities that become available next year may give their employees enough of an alternative that the lukewarm employers can drop their plans.

Both of these situations are closely correlated across industries, which leaves me to suspect that we can readily predict the industries that will retain employer insurance and predict those that will drop whatever health benefits they currently have. The scatter diagram below displays Bureau of Labor Statistics data on several industries according to the percentage of their employees in families above three times the poverty line (horizontal axis) and the percentage of employers offering health benefits as of March 2012 (vertical axis).

Bureau of Labor Statistics

I measured employees relative to three times the poverty line because that is the family income threshold beyond which the new exchange subsidies are less valuable than the income tax preference for employer-sponsored health insurance.

Industries like colleges, utilities and banking almost always offer health insurance, and about 80 percent of their employees will be getting a better deal on employer health insurance than they would from the exchange plans because their families are above three times the poverty line. For these reasons, I am confident that these industries will continue to offer health insurance to their employees in much the same way that they have in the past.

A couple of industries like “accommodation and food services” (i.e., restaurants), leisure and hospitality, administrative and waste services, and construction already have a mix of employers in terms of their health insurance offerings, so it would not be unusual from an industry perspective for those that currently have health plans to drop them during the next couple of years.

Moreover, the diagram shows how 45 to 60 percent of their employees do not come from families above three times poverty and therefore will have a significant federal health insurance subsidy waiting for them as soon as their employers drop coverage.

Employers that do not offer health insurance may be subject to penalties, but the penalties are not levied based on part-time employees, or levied on small employers, and even the penalties levied will be less than the subsidy opportunities created by an employer of middle- and low-income people that fails to offer health insurance.

For these reasons, I suspect that the stories we will hear about employers dropping insurance will disproportionately come from the industries shown in the lower left part of the scatter diagram, which collectively employ about 25 million people. Some employers in these industries have already discussed such plans.

Article source: http://economix.blogs.nytimes.com/2013/05/15/patterns-of-health-insurance-changes/?partner=rss&emc=rss

Bucks Blog: The Cost to Consumers of a Data Breach

A new analysis of a huge data breach last year in Utah estimates that more than 120,000 cases of fraud will occur as a result of information stolen.

Javelin Strategy Research’s analysis also estimates that each incident will result in more than $3,300 in losses, on average, and each consumer who is ultimately victimized as a result of the breach will spend about 20 hours and $770 on lawyers and time lost from work to resolve the case.

Ripple effects from the incident in the spring of 2012 will also prove costly to banks and businesses that may also suffer fraud as a result of the stolen information, said Al Pascual, a security, risk and fraud analyst at Javelin.

“We all need to be aware that breaches are occurring,” he said. “Breaches lead to fraud, and fraud affects all of us.”

Using the specifics of the Utah breach, Javelin applied what it has learned from its prior research about the impact of such breaches — namely, that having your personal information compromised makes you more likely to become a victim of fraud. Javelin estimates that roughly one in four recipients of a data-breach letter ultimately become fraud victims. (The estimate is based on information provided by consumers themselves, rather than law enforcement.)

“These breaches are driving fraud,” Mr. Pascual said. Criminals, he said, are generally not digging through trash or stealing mail to obtain personal data. “They’re stealing it digitally,” he said.

In the Utah case, about 280,000 Social Security numbers belonging to participants in the state Medicaid and Child Health Insurance Program were stolen from a database maintained by the Utah Department of Health. In addition, less sensitive pieces of information on another 500,000 participants were stolen.

Social Security numbers are particularly dangerous in the hands of criminals, because they can be used in combination with other information about you to create or access bank accounts and obtain credit.

The Social Security numbers were used by the department to verify eligibility for the insurance programs. But a contractor did not safeguard the server where the data was stored. The information was not encrypted and was protected only by a weak password that was easily hacked, the Javelin report said.

There may be little that individual consumers can do to prevent such a breach. But there are steps they can, and should, take to protect themselves, if they are notified that their Social Security number has been compromised in a data breach, Mr. Pascual said.

First, you should contact your bank and explain what has happened because many banks still use Social Security numbers to verify customer identity. You can ask for an alternative means of verification, like a specially assigned PIN, or a series of questions known as “dynamic” authentication. For instance, the bank may ask you about the size of recent transactions, or other details that only you would be likely to know, before allowing access to your account online or over the phone.

If the bank isn’t willing or able to provide an alternate method of verification, “It may be worth looking at institutions that offer better protection,” Mr. Pascual said.

Even if you haven’t had your information compromised, you should make use of your bank’s automatic account alerts. Such systems send you an e-mail or text message if unauthorized changes are made to your account, like the addition of a new authorized user or a new bill payment account, or a change of address. They can also notify you of significant transactions, like large withdrawals or transfers. “The consumer is going to know first whether a transaction is valid or not,” he said.

If you’re the victim of a breach and are offered free credit monitoring, you should take advantage of the service, he said. In the Utah case, victims were offered two years of credit monitoring and identity theft insurance.

Ultimately, banks should stop using Social Security numbers as identifiers, he said.

Have you had your personal information stolen? Did fraud occur as a result?

Article source: http://bucks.blogs.nytimes.com/2013/04/30/the-cost-to-consumers-of-a-data-breach/?partner=rss&emc=rss

Staying Alive: How Did You Get So Lucky With Renewal Rates?

Staying Alive

The struggles of a business trying to survive.

Thanks to everyone who commented on my last post about the most recent decline in my health insurance rates. As always, you raised a number of interesting questions. Here are a few I think warrant further explanation:

…it sounds like the monthly insurance prices show what coverage under your company plan costs you as an individual — or is that what your COMPANY pays per month to the insurance company per employee?

I am an employee of the S corporation that I own, which means that the costs that I listed are the same for me and my employees. But in case I didn’t make it clear, the numbers in the chart were the prices of insurance for each employee or family. In 2012, our bill from Keystone HMO was $7,595.35 per month. Of that, $1,066.50 is for me and my own family. That leaves $6,528.85 for employees who are buying coverage. They pay a third of that ($2,154.52) as a deduction from their wages. The company contribution to employee health insurance is $4,374.33 per month, or $52,491.96 per year. This money, if not spent on health insurance, could be used for any number of things. I could put it in my own pocket. Or I could pay down debt. Or I could invest in new machines, or more advertising. Or I could pay it to my employees as additional wages.

Are you saying that if you didn’t purchase the insurance yourself, you wouldn’t add to their salaries in order to purchase their own insurance? My understanding is that most economists believe that the costs of employer provided health care are actually borne by the employees, but your comment suggests that is not the case.

Economists believe all kinds of things that are contrary to how the real world works. This is one of them. If I understand this idea correctly, the economists are saying that the wages that employees can expect is somehow fixed, and that a portion of it is diverted, presumably by mutual agreement, from cash wages to health benefits. This is contrary to my experience.

Costs at most small companies are really borne by either the customers, whose purchases should cover all activities, or by the owners, who might have to reach into their own pockets to cover shortfalls. Once money enters the company, it is up to the boss to allocate where it goes. And wages are also decided by negotiation between the boss and the employee. I have hired more than 100 people and have never had one ask me how much the health coverage cost me. As far as I could tell, they were just happy that we offered coverage.

I see health insurance as an additional expense that is required to attract and keep good employees. Just like heating the shop, and providing good tools for them to use. If I skimp on any of these, it will have a negative effect. How much I choose to devote to any aspect of worker welfare is my choice. The money devoted to health insurance is not theirs by right.

If I decided to stop providing health insurance — and didn’t drop prices to my customers proportionally — I would PREFER to use the extra money to pay down company debt. However, I might need to pass some or all of it through to my people in order to retain them. How much would be determined by whether we were making a profit (in which case the extra money isn’t critical to surviving) and what my competitors were doing. Here’s some game theory to run past those economists: If every employer were to drop health insurance at the same time, none of them would need to increase wages to compensate, because the employees would have no reason to change jobs for a better deal. There would be no better deal.

Obviously, even though all employers would be better off if they did this, it won’t happen. But some number will be tempted to do so. I know I would, and here’s why: It would eliminate a bureaucratic headache and also eliminate the uncertainty of rapidly changing costs. It would be one less thing for me to think about. I could concentrate on my business instead. If I decide to keep offering it, it will be because of the drastic cost difference between individuals buying for themselves and the rates offered to employers. This is how the health insurance market operates now. Exchanges are supposed to fix that. But we’ll see how they play out.

From 2005 to 2013 a 50% increase amounts to an average annual rate of increase of about 5.5%. Is that out of line with other business expenses over the same period?

Take the $606.01 I was paying per month for family coverage in 2005. Using data from this calculator, the cost today, if it had risen at the overall rate of inflation, would be $717.77. This is actually a much larger increase than many of my expenses over that period. For instance, a sheet of cherry plywood that cost me $99.91 in 2007 cost me $71.25 last week. This kind of price drop holds for many of the materials I buy, in part because demand has never recovered from the 2008 meltdown. My rent has gone down by 20 percent. My labor bill has gone up, but that’s because I hired a bunch of people, not because of wage inflation. Business insurance costs have been steady. So, no, my business costs have not risen at the same rate as my medical costs.

Wow. How’d you get so lucky that your insurance rates dropped?

That’s a good question, so I asked our benefits administrators whether costs had gone down for just my company or in general. Here’s the answer I got:

Dear Mr. Downs,

It was about your group in particular (not the AIA as a whole) and that overall for the last 12 months your group ran well.

What that means is that what the carrier paid out on behalf of your group in medical/rx claims did not exceed the amount they charged you in premium.

If this is true, it’s pretty scary. This is confirmation that demographics of the people I hire directly drive my health costs. The system is incentivizing the hiring of younger, healthier workers (I have written about this previously), and giving me a perfectly rational reason to turn down older, potentially sicker applicants. That should be fixed.

I don’t know what Obamacare is going to bring, but I really doubt it is going to reduce health care costs {or} health insurance costs.

I sort of agree. The only thing that will bring costs down is a broad consensus by the voters that the system has to change. Politicians won’t lead the way on this. They get too much money from the various interest groups that benefit from the current system. If employers take advantage of the Affordable Care Act to get out of the health insurance game, a much larger number of people will be forced to confront the entrenched special interests (by which I mean insurers, doctors, and hospitals — I believe they are all in cahoots on this).

Then we might get change we can believe in. But I doubt this will happen. I suspect that most employers will be unwilling to confront their employees with such a drastic change. It’s really, really hard to look your people in the eye and tell them that you are taking away an important benefit. In the past, I have provided insurance to my people because I believe that everyone needs it, and our system put that responsibility on me. The new law provides an alternative path for people to buy their own policy, allegedly at reasonable rates. If that turns out to be true, I might pull the trigger.

Bosses: what would it take for you to do this?

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

Article source: http://boss.blogs.nytimes.com/2012/11/27/how-did-you-get-so-lucky-with-renewal-rates/?partner=rss&emc=rss

Today’s Economist: Bruce Bartlett: Tax Cuts, Tax Rates and Tax Shares


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Last week, the Internal Revenue Service posted the latest individual income tax data for tax year 2010. Supporting the Republican worldview, the data show that the share of total income taxes paid by the rich increased; supporting the Democratic worldview, they show that the wealthy’s share of total income increased more, leading to a decline in their average tax rate. Sorting through these competing facts is a bit like determining whether the glass is half-empty or half-full, but I’m going to try.

Today’s Economist

Perspectives from expert contributors.

I will start with the top 1 percent of income taxpayers, who are unambiguously rich by any definition of the term. In 2010, this group included all tax filers with adjusted gross incomes above $369,691. Remember that A.G.I. excludes many forms of income, including benefits such as employer-provided health insurance, unrealized capital gains and interest on tax-exempt municipal bonds.

Internal Revenue Service

Conservatives like to contend that the increasing share of federal income taxes borne by the wealthy shows that they are carrying the rest of us on their backs, so to speak. Indeed, the percentage of all income taxes paid by the top 1 percent has risen to 37.4 percent from 33.2 percent in 2001. This necessarily means that the share of the bottom 99 percent has fallen.

The following table shows that in fact the share of total income taxes borne by those with lower incomes has indeed fallen. For example, the bottom 90 percent of tax filers now pay 29.4 percent of all income taxes, compared with 36.3 percent in 2001.

Internal Revenue Service

Liberals note that a key reason for this is that the incomes of most people outside the rich have stagnated or fallen. In 2001, it required an income of $23,187 in 1990 dollars to be in the top 50 percent of tax filers; in 2010, that income figure had fallen to $20,586. Concomitantly, the share of total income accruing to the bottom 50 percent fell to 11.7 percent in 2010 from 14.4 percent in 2001.

Another key reason for the declining share of income taxes paid by the nonwealthy is that Republican tax policy since the 1970s has consciously aimed at reducing their tax burden.

The following chart from the conservative Tax Foundation illustrates how Republican-sponsored increases in the personal exemption and creation of the earned-income tax credit and child credit completely eliminates the income tax liability for a family of four with $45,000 of income.

Tax Foundation

The declining share of income taxes paid by the nonwealthy was at the root of Mitt Romney’s charge that 47 percent of Americans are dependent on government. After the election, he attributed his loss to “gifts” that certain constituencies, “especially the African-American community, the Hispanic community and young people,” receive courtesy of taxpayers.

Needless to say, there are many problems with this grossly simplistic view of who gets government benefits and who pays for them.

It’s undoubtedly the case that a great many of the elderly still think of themselves as taxpayers even though they may not have actually paid any income taxes in years. Nor do they view themselves as receiving gifts in the form of Social Security and Medicare benefits. They believe they paid for these benefits from taxes during their working lives and would resent being characterized as moochers.

Another problem is that when Republicans talk about the rising share of income taxes paid by the wealthy, I think they are implicitly assuming that the government is still paying for all its spending with taxes. But it’s not; the federal government has run deficits since fiscal year 2002, to a large extent because of tax cuts. According to the Congressional Budget Office, lower revenues have been responsible for about half the increase in the national debt since 2001, about half of which resulted from legislated tax cuts and half from slower-than-expected growth.

Congressional Budget Office

Across-the-board tax cuts financed with deficits will necessarily raise the share of taxes paid by those with upper incomes. Consider this example. The government raises $10 in taxes and it is divided among three taxpayers. Ms. Poor pays $1 (10 percent), Ms. Middle pays $3 (30 percent), and Ms. Rich pays $6 (60 percent). Now the government gives everyone a $1 tax cut and its revenues fall to $7. Ms. Poor now pays nothing, Ms. Middle pays about the same percentage (29 percent), but Ms. Rich now pays 71 percent. Everyone received a tax cut, but the tax shares are now skewed much more toward the wealthy.

In a general sense, this is what has happened to the income tax and illustrates why it is possible for effective tax rates on everyone to fall and at the same time raise the share of taxes paid by the wealthy.

Article source: http://economix.blogs.nytimes.com/2012/11/27/tax-cuts-tax-rates-and-tax-shares/?partner=rss&emc=rss

Economix Blog: Visiting the Doctor Less, but Spending More on Health



Dollars to doughnuts.

The average annual number of times Americans visit medical providers has been falling over the last decade, according to a new report from the Census Bureau. But their overall spending on health care is still rising.

Note: Data on medical services utilization are not available in the SIPP for 2006, 2007, and 2008. Source: U.S. Census Bureau, Survey of Income and Program Participation, 2001 Panel, waves 3, 6, and 9; 2004 Panel, waves 3 and 6;and 2008 Panel, waves 4 and 7. Chart from Health Status, Health Insurance, and Medical Services Utilization: 2010, by Brett O’Hara and Kyle Caswell.Note: Data on medical services utilization are not available in the SIPP for 2006, 2007, and 2008. Source: U.S. Census Bureau, Survey of Income and Program Participation, 2001 Panel, waves 3, 6, and 9; 2004 Panel, waves 3 and 6; and 2008 Panel, waves 4 and 7. Chart from “Health Status, Health Insurance, and Medical Services Utilization: 2010,” by Brett O’Hara and Kyle Caswell.

Among Americans 18 to 64 years old, the average person visited medical providers 3.9 times in 2010, compared to 4.8 times in 2001.

Both healthy Americans and less healthy Americans reported going to the doctor less frequently in 2010 than they did in 2001:

Note: Data on medical services utilization are not available in the SIPP for 2006, 2007, and 2008. Source: U.S. Census Bureau, Survey of Income and Program Participation, 2001 Panel, waves 3, 6, and 9; 2004 Panel, waves 3 and 6;and 2008 Panel, waves 4 and 7. Chart from Health Status, Health Insurance, and Medical Services Utilization: 2010, by Brett O'Hara and Kyle Caswell.Note: Data on medical services utilization are not available in the SIPP for 2006, 2007, and 2008. Source: U.S. Census Bureau, Survey of Income and Program Participation, 2001 Panel, waves 3, 6, and 9; 2004 Panel, waves 3 and 6; and 2008 Panel, waves 4 and 7. Chart from “Health Status, Health Insurance, and Medical Services Utilization: 2010,” by Brett O’Hara and Kyle Caswell.

Visits to the doctor and other medical providers may be falling, but health spending is still substantially higher today than it was a decade ago, according to the Labor Department’s Consumer Expenditure Survey.

The typical household (including residents of all ages) spent $3,313 on health care in 2011, compared to $2,771 in 2001, after adjusting for inflation.

Sources: Consumer Expenditures Survey, Consumer Price Index.Sources: Consumer Expenditures Survey, Consumer Price Index.

Health care spending has generally been rising even as total household spending has stagnated or fallen in recent years. As a result, health care spending is eating up a larger share of total household budgets than it used to. As of 2011, the typical American household spent 6.7 percent of its total expenditures on health care.

Source: Consumer Expenditure Survey.Source: Consumer Expenditure Survey.

Almost every category of health care spending has been rising.

The average American household spent $768 on medical services last year, an increase of 3.1 percent from the year before. It also spent $1,922 on health insurance, an increase of 1.8 percent from the year before; and $134 on medical supplies, up 9.2 percent from the year before.

Annual household spending on prescription and nonprescription drugs fell 2.3 percent, however, to $489.

Spending growth on health insurance is slower than that for some other health care categories, but the base was so large to begin with that health insurance is accounting for a growing percentage of the typical household’s total health care spending. In other words, a bigger share of households’ health care spending is going through insurance companies as opposed to coming from co-payments and other out-of-pocket spending.

Source: Consumer Expenditure Survey. Source: Consumer Expenditure Survey.

Article source: http://economix.blogs.nytimes.com/2012/10/01/visiting-the-doctor-less-but-spending-more-on-health/?partner=rss&emc=rss