Who pays for healthcare insurance? … Brush up on your economics before answering.

TakeAway: As healthcare costs increase, companies keep the lid on wages.  That’s why takehome pay has been stagnant for so long.  It’s basic economics.

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Excerpted from WSJ, “Health Reform and Competitiveness”, June 17, 2009

Employers may write the checks to the insurance companies, but workers still pay for the coverage they get from those employers.

Why? Because the total cost of an employee is what matters to businesses, and fringe benefits are as much a part of compensation as cash wages.

When health costs rise, higher insurance premiums aren’t just lopped out of profits. Instead, nonhealth compensation drops to fund the higher premiums. Or wages rise more slowly than they otherwise would. [That’s why wages have been stagnant for so long.]

The White House Council of Economic Advisers notes exactly this point: If medical spending continues to accelerate, take-home pay will continue to stagnate.

The exceptions are heavily unionized businesses like auto makers that have locked themselves in to gold-plated coverage, especially for retirees. They have a harder time adjusting health costs and wages.

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It’s certainly true that the U.S. employer-based insurance system can dampen entrepreneurial spirits. There’s the “job lock” phenomenon, in which employees fear leaving a less productive job because they’re afraid to lose their health benefits.

Another problem is that insurance costs more for small groups than the large risk pools that big corporations assemble, meaning that it’s harder to form new businesses that can offer policies.

Full article:

One Response to “Who pays for healthcare insurance? … Brush up on your economics before answering.”

  1. Mike Says:

    Wages are based on supply and demand, not cost. The cost impacts profitability.

    Ken, can you argue that a company like Starbucks might be able to realize higher shareholder returns if it didn’t have to cover healthcare costs? Healthcare costs at Starbucks are higher than coffee bean COGS.

    Government run healthcare should be good for business. Maybe it’s not the best for people, but arguably it would be good for shareholders.

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