Insurance, companies...and you

Interesting article about how one company, Scotts Miracle-Gro and its CEO Jim Hagedorn, is dealing with rising insurance rates. Interesting for two reasons, one, it touches on the larger topic of how complicated employer based health insurance is becoming, and two, the article completely misses the larger point with its examples.

I'll start with the second. The article uses a lawsuit filed by a former employee (although his status is contested) who claims he was fired because he was a smoker but then goes into how Scotts has a whole expensive program in place to help people get healthier to bring down insurance costs. In my mind, this is really two articles. One about Scotts efforts to help employees get healthy thereby reducing insurance costs, and one about Scotts firing people who are unhealthy to reduce insurance costs. While it may not seem like much of a difference, there's a huge gulf between the two. I want to be clear, I'm not saying Scotts is did anything wrong, rather I think there was a very interesting and topical story about Scotts reducing insurance costs by firing unhealthy people. If the company's figures are correct and health insurance consumed 20% of the net profits and was growing at a rate of 20%, then it had to act. No one complains when a company fires an employee who is costing it money through ineptitude, slacking, etc, why is it wrong to fire an employees whose actions are hurting the company due to the health insurance impact? Touching on point one above, if the company is on the hook for your health insurance costs, they do have some (the line is very debatable) right to interfere with your choices as it directly affect the company. You will see companies moving farther and farther into your private lives in an attempt to constrain the growth of health insurance expenses. It will also be hard to argue against it, after all, they're paying for it.

Which is why employer based health insurance is on its last legs (unless congress steps in and forces things). It makes the least sense for the employer and employee. Not the benefit, but the method. Health insurance is a major carrot for most companies and they cannot compete for high quality employees without it. But its also enormously inefficient for the employees. They cannot shop for the plan that best suits them, and are forced into the company plan. And while it is subsidized, like all subsidies its still costing the employee only the cost is hidden. Lower profits mean less money to pay out, less money to invest, lower cushion against hard times, etc. Bottom line, less money is less money. Not only that, but healthy employees pay the costs for the unhealthy ones. Does that really make sense?

What does make sense is for employers to pay employees and for employees to determine how to best use their income. As an employer, I would much rather cut health insurance but pay employees more. Let employees find the plan that fits them best, if they can find it cheaper than their increase in pay, good for them. Heck, they could even opt out and decide to take the risk, whatever. For this to really work private citizens should be able to band together for cheaper rates, which, I believe requires a change in law. I would love to see private co-ops. Also, as I've said, W's plan to tax this benefits like cash will make this transition easier.

Health insurance is going to force companies to examine their own practices. Some will opt out and try to hire without the carrot, some will dive deeply into employee lives in an attempt to constrain the expense growth, some will, inevitably fire unhealthy employees. It doesn't have to be this way. Employees should manage this expense like they do all their other expenses. Its the most efficient way.

Finally, I do think its odd that employees are comfortable letting the HR department manage something so very personal. A company owns everything it pays for, from emails to the office. If it pays for your medical bills, it follows that they own the rights to that information as well. If employees paid for it, there would be no debate, no lawsuits, and no claim of Big Brother or other personal invasions. Bad policy begets bad policies.

My take on W's Insurance Tax Plan

I've been mulling over W's health insurance initiative, at least the tax code part. Here's the passage from the Sate of the Union Address.

And so tonight, I propose two new initiatives to help more Americans afford their own insurance. First, I propose a standard tax deduction for health insurance that will be like the standard tax deduction for dependents. Families with health insurance will pay no income on payroll tax -- or payroll taxes on $15,000 of their income. Single Americans with health insurance will pay no income or payroll taxes on $7,500 of their income. With this reform, more than 100 million men, women, and children who are now covered by employer-provided insurance will benefit from lower tax bills. At the same time, this reform will level the playing field for those who do not get health insurance through their job. For Americans who now purchase health insurance on their own, this proposal would mean a substantial tax savings -- $4,500 for a family of four making $60,000 a year. And for the millions of other Americans who have no health insurance at all, this deduction would help put a basic private health insurance plan within their reach. Changing the tax code is a vital and necessary step to making health care affordable for more Americans. (Applause.)

Says House Ways and Means Committee Chairman Charles Rangel (D-NY),

This is a dangerous policy that ultimately shifts cost and risk from employers to employees and could result in a higher number of uninsured. The new, Democratic majority in Congress is interested in relieving, not increasing, working families' tax burden.

Clearly, two hearts living as just one mind. Now on to the analysis. NYT tackles it here (I know, Stalin I know, but for all your paranoid ramblings, NYT still does the best job - but I have to admit, "With his proposal to uproot a tax break that has been in place for more than 60 years..." is not the most neutral way to start the article).

I agree with W on this one, at least as a start (and I haven't heard him say, "This will fix things all by itself."). However, the tax code is a blunt instrument, mostly helping those who itemize and make enough to pay taxes. For those who don't fall into either category, this is not going to be a big deal. One real issue is that the bulk of people who are uninsured fall into the latter category. So I think its a solid argument to approach the President's bill with some skepticism as far as just how within reach this will put health insurance for the uninsured.

But as one part of a much needed solution, at this point I'm a fan (I'm not hedging here because it comes from W, rather because tax-code cause/effect isn't the easiest thing to work through - but that's why you have me...right...and subscribe to our email feed to the right...right?). Here's what I like. Rep Rangel is correct, this does shift the risk from employer to employee, and that's where it should be (so at least you can say he understands the point). The employee understands their needs better, and is better prepared for the risk/reward decision than an employer who buys a blanket policy for all employees. When the employee takes the personal risk two things happen. They buy the policy they need, and they shop for value, not just from the insurance company but also in treatment. Take into account incentives that will be offered by insurance companies to cover health, home and care in a bundle, and that employees do change jobs, often taking a period of risk without insurance, or even become trapped by one job precisely because of insurance benefits and it seems that attaching insurance to the employee is a much better option. I need someone to explain to me why this scenario is worse than having the employer pay create the system.

From what I gather, W is basically saying that insurance is a perk that has value. His tax cut is really a tax increase, immediately followed by a tax cut. It's a two step process, this is important. Now employees don't pay any tax on the benefit of employer based health insurance even though it is a perk that has definite and quantifiable benefit. What he's immediately proposing however, is to offset this newly created taxable event with a tax break. In my mind, a large part of getting comfortable with this plan is getting comfortable with creating a new tax, one that can be manipulated by later lawmakers, and then cutting it.

According to NYT, W's "economic rationale for Mr. Bush’s proposal is that too many people have “gold-plated, deluxe” health insurance, which encourages them to use excessive amounts of health care, driving up costs for everyone." Really hard to argue with that one too. But some try. Mr Robert D. Reischauer, a former director of the Congressional Budget Office said,

The president’s proposal addresses inequities in the tax code that provide an open-ended subsidy for premiums paid by employers. If your employer does not provide health insurance and you have to buy it on your own, you get no tax benefit at all. The president’s plan would eliminate that distinction.”A glaring problem with the president’s plan is that he did not call for any stronger regulation of the individual insurance market.

And the NYT tacked on,

In that market as it now exists in most states, insurers can deny coverage or charge higher rates to sick people.

I'll take them in order. Notice that Mr Reischauer shifts the focus. In the first part he gets W's goal. In the second, he just tacks on some random criticism. Again, at least as far as I've read, W does not claim that he's "solved the health insurance issue." I see this as one part of the solution. Calling for stronger regulation may be another part, but why join them? Doesn't that risk drowning both of them? Oh well, I guess he had to say something to make the paper.

The second part is a major can of worms. What people don't get is that by forcing insurance companies to cover sick people for the same cost as healthy is that everyone pays. There are no free meals here. If you demand that an insurance company cover a sick person for the same cost as a healthy person, what you're really demanding is that the healthy person pay more for services they won't likely need. If said healthy person is poor, you've just increased the cost of his insurance. I'm not sure this is the goal. I suppose one could make the argument that under the current system all employees get the same coverage, healthy or sick. But the reality is that this means two things, you may not be getting the most insurance you can for the buck (here what the employer pays in your name) because the company's rate is higher with more sick people, and customers are paying more for goods because the company works the cost of insurance into the cost of goods. Again, there are no free meals. You are bearing the cost somewhere. W's plan at least puts it close to home so you can monitor and control it.

This is already a long post so I'll just summarize from here. W's plan definitely shifts the momentum towards employee based insurance. One, I haven't heard why this is bad. Two, employer based insurance is no longer what it was. It's the fastest growing expense line in most businesses and they're cutting back. The momentum is already away from employer based insurance. I like this proposal. It is not the end, there is no "Well, that's that" moment with this, but it is a step in the right direction. Provided, of course, that Congress doesn't get all weird with this new tax class.