Who Really Pays?

Warning: Blog quibbling detailed below. Proceed at own risk.

It seems a post of mine on state efforts to mandate health insurance has caused a stir. I started the controversy so I figure it's time to clarify my original statements and respond to my responses.

Insure Blog took issue with the statement "employers pay for health care":

Companies do not pay taxes, and they do not pay for health insurance.
In case you missed that, let me repeat:
Companies – businesses – pay neither taxes nor insurance premiums.
Companies do collect (sales) taxes, and pass them on to the states in which they do business. They also include any business taxes due in the price of the product or service. They pay employees a portion of their salary, and forward the balance to the insurance carrier (and/or state government).
They do not actually pay the taxes, nor the insurance premiums.

Of course Henry is right: benefits began way back when as a substitute for wage increases when WWII led to a wage freeze in the U.S. Benefits represent income. Employers don't use their wealth reserves to provide insurance, they use revenues. But benefits are counted as an expense, and considered in economic forecasts and such. So while employers are channels for the money, they are expected to ensure the benefits are paid. That's why forcing the expense (i.e. the state mandates, which call for 8-10% of payroll to be dedicated to benefits) affects employers. They will react in a variety of ways (no wage increases for a few years, raising prices), but they have to react somehow to stay afloat.

Next, Tusk and Talon hopped on the bandwagon to make the distinction between "economic incidence" and "legal incidence":

What we've got here is, a failure to communicate. Ms. Steadman is talking about the "legal incidence" of the cost of the premiums. The employer has retained the insurance carrier and is legally obligated to make payment to the carrier for the coverage purchased. In this she is absolutely correct.

Mr. Stern is referring to the "economic incidence" of the cost of health premiums, i.e., who actually pays for it. (As alluded to, similar arguments play out in the arena of tax policy for obvious reasons.) Economic incidence tries to identify who was actually deprived of economic value. In most circumstances economic incidence of health insurance premium depends on the price elasticity of labor and of the company's goods or services.

I wasn't really specifying either in my original post (here), but more discussing the implications of such a policy change. I obviously understand the fact that the economic incidence can fall on a variety of people, but will most likely fall on employees and customers.

A few of these commenters point to the fact that small businesses are the ones who will suffer the most in such legislation. That's a fair point except that most of the proposed legislation has exceptions for truly small businesses. Again, the target of the legislation is larger companies that legislators believe are failing to fulfill their benefit duties, like Wal-Mart.

Thankfully, Elisa comes to the rescue with reality to save us from our quibbling:

How about the employer gives up their $1M/quarter lease on a private corporate jet for the CEO and has the CEO fly coach like all of the CEO's employees? (Yes, I speak as a former employee of a company that kept a corporate jet even as our share price tumbled, net loss per share skyrocketed, and as lay-offs came at regular intervals.)

How about the employer doesn't pay consultants to come up with one more logo change (the 3rd in 5 years) thinking a new logo will "re-invigorate the brand"?

My point is that health care is an expense. There are two sides to every income statement: income and expense. Companies, whether public or private, set financial targets and budget accordingly. And anyone who has sat through the endless corporate budgeting process knows there is more than one way to skin a bloated corporate fatcat.

We are not a pure capitalist society...we regulate how much profit ends up being made in many different ways. Companies are free to make fair profit, not unfettered profit. That's how we have environmental protections and minimum wages and the Family and Medical Leave Act and patents, for goodness sake, even though companies could rightly argue they diminish their ability to make as much profit as they could.

So, I'm no naif...I know the likely chosen methodology for meeting financial targets will be at the expense of the customer or the average working stiff, rather than at the expense of the Executive Staff or the Board of Directors or God forbid, the shareholders. But let's not pretend that's some mandate or some economic requirement. It's choice and priorities.

So the lesson here? Employers don't literally "pay" for insurance (a point I already know, but the economists will get you for saying it in a general sense), the economic incidence could fall in a number of places, but will most likely fall on employees and customers, and the states' plans to mandate coverage need to be carefully considered in light of the above.

Thanks to everyone who weighed in, it kept me occupied during the end of the day lull.

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[Bob]

Whose reality?