The majority of economists trained in the classical tradition believe there is a public policy tradeoff between distributional equity and economic efficiency; to get more of one, you get less of the other. But the U.S. health care finance system is an exception to that rule, as it is both inequitable and inefficient. You read about the inequities in my prior post; this post is about the economic damage. By tying the availability of affordable health insurance to group plans provided by employers, the current system prevents many workers from moving to jobs where they could be better compensated. It also dissuades them from becoming entrepreneurs, or becoming freelancers by choice, if that is what they would prefer. Therefore, the link between employment and health insurance has created a kind of economic serfdom for millions of Americans. For low, moderate, and middle income households lacking health insurance, since an serious illness or injury would wipe them out, the lack of such insurance means it is irrational to save. And, the burden of providing health insurance for middle-aged and older people has made older companies — and communities — uncompetitive with newer, growing firms and taxing jurisdictions. This sets up a merry-go-round in which the former are abandoned for no other reason than the age distribution of their employees, stranding those employees and residents and wasting capital, infrastructure and other resources. That issue is going to become critical as large swaths of suburban and Sunbelt America go into decline in the wake of the housing bust, and confront fiscal crises similar to what older northern cities faced in the 1970s.
The tie between health care and place of employment is a historical accident, but one that may be said to favor companies. Anyone with both employer-provided health insurance and a chronic health problem, or with a family member who has a chronic health problem, is inhibited from changing jobs, since the new employer’s health insurance plan many not cover their “pre-existing” condition. The employment relationship, therefore, is no longer voluntary – the employee is more like a slave, unable to sell their services in the free market. It is a one-way relationship — the employee can be fired when it suits the employer, but cannot leave. (The employer, however, may be inhibited from laying him or her off by the possibility of a lawsuit that the employee would almost certainly be desperate enough to file.)
Small and medium sized companies that still offer health insurance are inhibited from hiring potential employees who have, or who (based on their genetic history) may develop, expensive chronic health problems. For small businesses, the health care costs for a single unhealthy employee may be enough to bring on a devastating premium increase. As a result, genetic testing may make some potentially valuable workers increasingly unemployable. And the unwillingness to hire someone who would otherwise be the best employee, for no other reason than the impact on health insurance, hurts the companies themselves.
Those over age 50, in fact, can become virtually unemployable today – until they reach age 65 and qualify to Medicare. That is because those over 50 are more likely to develop expensive health problems. No wonder the employment rate for men age 50 to 65 is falling, even as it rises for men age 65 and up. If laid off in a recession, as will happen to many in the next year, older people have that much more trouble finding a new job, leading to more economic losses. And if they become ill while outside the charmed circle of employer-provided (and government subsidized) health insurance, they risk having their savings wiped out and facing old age in poverty. The result is lost economic potential for the economy, and hardship for the individuals. And among my generation, defined benefit pensions have generally been taken away, and early retirement is not an option.
What about choosing, as opposed to being forced into, self-employment? In many of the fields where one has the potential to have the greatest positive impact on society — as an artist, an inventor, a scientist, a missionary, even a political candidate — one is likely to end up outside the sphere of employment with health benefits, at least for a time. Among the self-employed there is a-sub group of very valuable, but politically under-represented people – entrepreneurs who hope to become major employers themselves someday. A burst of entrepreneurship could turn the economy around, replacing older businesses and types of businesses that are declining and consolidating. Would-be entrepreneurs, however, have a big disincentive to start new companies. They are inhibited by the high cost of individual health coverage, and potential financial ruin if they choose, or are forced, to remain uninsured and become ill. Young people, less likely to become sick and more reckless in general, may be willing to take that risk. But experienced workers in their 40s and 50s, with accumulated knowledge, contacts, and assets, can become entrepreneurs as well, and may be more likely to succeed. The tie between health insurance and employment is a big disincentive for them.
Canada, I have read, has double the rate of self-employment of the United States. I consider that double the level of economic freedom, because economic freedom is not just the freedom to spend what you have earned as you choose, but also the freedom to choose how to earn it. The lack of economic freedom reduces the flexibility of our economy, and its ability to improve the well being of even well off people.
In some ways, the economic damage of our employer-linked health care system is much worse than the inequity. After all, if an uninsured person were to become seriously ill, he or she would eventually become poor enough to qualify for Medicaid and receive the required health care, at least in more generous states like New York (and perhaps for those traveling to such states). As my boss put it, we have a national health insurance system. The problem is it is Medicaid, and it sucks.
While certain forms of wealth are exempt from being counted against Medicaid eligibility, general savings are not. If one is uninsured, and the next generation increasingly will be uninsured, therefore, there is little incentive to save. Sooner or later someone in a family will require health care, and sooner or later those savings would be gone. Lots of Americans are facing severe economic hardship as a result of a poor choice to live on the edge, go into debt, and not save. Our major businesses are increasingly being sold to foreign governments, because Americans do not save. There is every reason to doubt the importance of economic incentives like these in America’s low savings rate. But there is no question that the current health care finance system provides an incentive for the healthy to stay uninsured, and to not save in case they do not stay healthy.
I haven’t even touched on the health insurance-related economic damage that most people think about — the effect of rising costs on the competitiveness of old-line corporations, like the Big Three in the auto industry. The problem is that as people get older, they have more health problems, and health insurance becomes more costly. Health insurance provided to retirees is more costly still, particularly before age 65 and eligibility for Medicare. A slow-growth business with lots of older employees, therefore, will — all else equal — have higher costs than a new, growing company with fewer older employees and lots of new ones just arrived. As health insurance costs become larger and larger, this factor becomes more and more important, possibly sending established companies into decline even if they are, otherwise, doing a better job. The economic assets embodied in those established companies are then lost.
Did Kmart replace the department stores, and Wal-Mart replace K-mart, because of their advanced logistics and customer service? Or because of the average age of their employees, and thus the cost of health insurance? And now that Wal-Mart’s growth is slowing, the average age of its “associates” is creeping up as well, making profits harder to come by. There were news stories about Wal-Mart specifically assigning physically demanding tasks to less healthy employees in an attempt to force them to quit.
What will really drive home the damage wrought by employer-linked health care, however, is a coming decline in suburban and Sunbelt America that will rival the economic, social and fiscal collapse of older central cities in the 1970s. While the shells of buildings could potentially last forever, building systems wear out after 50 years or so, and older housing tends to become obsolete as tastes change. If land values are high enough, you get teardowns and rehabilitation, but if they are not, you get pass downs — housing is passed down to people who are poorer than those who lived there when the houses were newer. And since whole communities tend to be built at about the same time, those whole communities become relatively poorer. Large areas of U.S. central cities were built, for the most part, in the decades before the Great Depression, and 50 years later those communities went into decline. The suburbs, on the other hand, were built in the years after World War II. Their housing stock began reaching 50 years old in the late 1990s, and the housing bust will be the beginning of large scale pass downs there.
There is another factor in community decline, however: public employee retirement benefits. Local governments and school districts generally offer very rich benefits to public employees in retirement, but do not set aside any more for retiree health care and do not set aside enough for retiree pensions. This is a way to get more public services for less today, and defer the costs to tomorrow. Because developing suburbs had few residents in the past, when they were rural, they also have few older and retired public employees absorbing taxes. All the taxes go for services, so the taxes are lower and services better than in older communities with lots of older employees and retirees. But as those communities fill, growth eventually stops, the average age of public employees rises, and the number of retirees soars. More and more tax dollars must be diverted to health insurance for those who are no longer providing public services. Fewer and fewer tax dollars are available for services today. Taxes soar, the infrastructure deteriorates, services face cutbacks, and the schools decline.
Commenting on another of my posts on this subject, someone concluded that communities are like sharks — the minute they stop moving forward, they start dying. The burden of public employment retirees is why population decline is so fiscally damaging. Even stability brings reduced circumstances, particularly if a taxing jurisdiction is becoming less affluent.
It is the huge increase in the cost for retired public employees, as much as economic change, social services and debts, that led to the huge increase in taxes and decline in public services in New York City in the 1970s. The city’s tax burden has barely fallen, and its services only slowly recovered, since then. Unless the cost of health insurance is somehow nationalized, local governments and school districts in middle- and upper-middle-income suburban and Sunbelt areas all over the United States, face a similar fiscal collapse and decline in their quality of life.
Only recently, Statement Number 45 of the Governmental Accounting Standards Board began to require that state and local governments set aside money in advance for retiree health care. New York City, where residents have grown used to high taxes for a lower level of services, has tried to comply. Others have not. Texas, a growing state that wants to put off paying for today’s public services (through accumulated obligations to retirees providing those services) has refused to comply.
According to testimony presented in the New York State legislature by the New York State Conference of Mayors:
“Do our municipalities have the financial capacity to fund these liabilities, even if the authorization existed? We would argue that, at this time, most certainly do not. The fiscal picture for most local governments will go from bad to worse when the future expense of health benefits appears on their financial statements. It is no secret that New York’s local governments face significant fiscal challenges. Population declines and eroding tax bases, particularly upstate, coupled with rising costs, which are in large part due to collectively bargained employee salaries and benefits, has led to an increasing reliance on the property tax. Since local governments are inherently labor intensive, workforce costs generally represent the largest component of local budgets. According to OSC data, salary and fringe benefits account for approximately 56 percent of expenditures in cities and 32 percent of expenditures in villages. For some of our members, retiree health insurance expenses have become one of the largest components of this liability, even exceeding the health care costs of their active employees in some cases.”
There you have it. Health care for the retirees, who provided services yesterday but had their expenses put off until today, costing more than health care for the employees providing services today. Another generational inequity. Most middle- and upper-income suburbanites would never consider accepting the quality of schools and public services, and the tax burden, of most older, declining central cities. But they will have to. Because unless universal health care is implemented at the federal level, and supercedes promises of retiree health care under U.S. labor law, not only will GM, Ford and Chrysler possibly go under, but also many of the communities of the United States.