Government health care cost fallacy

Posted by Marc Hodak on July 14, 2009 under Invisible trade-offs, Reporting on pay | 3 Comments to Read

One of the more persistent fallacies about health care costs is that they make our businesses less competitive.  The reasoning goes that our companies must bear health care costs directly, while their European counterparts don’t.  If the government took over those health care costs by providing universal coverage, the costs to business would drop correspondingly and, presto, they become more competitive.

As any good economist knows, this reasoning is incomplete.  To the extent that health care costs drop for companies, taxes to cover those health care costs now borne by the government will go up.  Since those taxes will be paid by workers–mostly the same workers now getting coverage from their companies–the costs of health care will have simply shifted from the companies to the workers.  But this would not represent the likely equilibrium.

Companies would have to compensate their workers the same regardless of whether health care coverage was part of the compensation package or not.  (This may not be obvious on first blush, but it’s true–trust me.)  And since workers are bearing a higher personal cost via their taxes, they would require higher compensation to cover those costs, which they could demand in a competitive market for talent (again, what companies don’t provide in one kind of benefit, they will need to replace with another or with cash).  Of course, the people forced to exchange cash for company health care coverage aren’t exactly the same people getting their taxes raised in exchange for government health care coverage, which would create a new kind of equilibrium–this all gets sorted out by the market in its own, unpredictable way.

This view of total company costs being a wash regardless of whether companies or the government are providing the coverage is well accepted by economists of every stripe, from Bush’s former CEA Chairman Gregory Mankiw to Obama’s current CEA Chairwoman Christine Romer (who called this argument “schlocky”).

Yet, the Wall Street Journal publishes an entire article based on this fallacy.

At some businesses, in fact, health care is the highest expense after salaries—with devastating consequences. Owners must skimp on vital investments like marketing and research. Some can’t hire the people they want because top candidates demand premium coverage. Or they end up understaffed because of the high cost of insurance—and lose potential clients as a result.

Clearly this Wall Street Journal writer doesn’t read the Wall Street Journal.