Health Care Reform as Economic Stimulus

There is some dicsussion that health care reform should take a back seat in an economic stimulus package. 

I suggest that health care reform can go a long way to jump start the economy by itself.  

I make that argument for three reasons.  First the current system of health care financing distorts the competitiveness of the American economy.  Second, the current system of health care financing distorts the job market.  Third, which is really an extension of the second,  the current system of employment based health care financing inhibits the very creative forces that can energize the economy.

The current system of health care financing distorts the competitveness of the American economy. 

This occurs both domestically and internationally.    Let’s start by positing an ideal situation – if the cost of any input, say health care, is equal for all economic actors, the economy is more competitive.  Some my quibble over the term “equal”.  But a system that allows one employer in an industry to have a competive cost advantage over another employer because the first employer does not provide health care benefits and the second one does, is not a competitive economic system.   It may qualify as a free market system, a system with no rules or where winners make the rules; but it is not a competitive system.

But inequality in employer health care financing is more complicated than the decison to provide or not provide health care benefits.  It has numerous manifestations.  There can be different benefit levels, different levels of cost sharing between employees and employers,  or different population risk profiles.  The decsion to provide or not provide health care benefits to retirees can be a siginficant decsion affecting the competiveness of a company both nationally and internationally.

In our economy today, employers seek a competitive advantage, or to maintain competitiveness,  by reducing the costs they pay for health care.  They can do that in a number of ways that break down into three categories: provide a benefit package that is less “rich”, shift costs to their employees, or cover fewer people.  

But the real question is, why should a company gain a competitive advantage in the marketplace for lowering the cost of an input that has nothing to do with their core business.  Or conversely, why should a business that might otherwise be considered successful, be penalized in the marketplace, because they choose to take on more of the social costs of providing health care than their competitors.  Certainly the auto industry could fit into the latter category.  

Over the fifty years since Walter Reuther and GM President, Charles Wilson, agreed to employment based health insurance, the number of workers needed to produce a car has been sharply reduced.  Any other business would be rewarded in the marketplace by cutting its manhours by two-thirds.  Unfortunately, General Motors and the other automakers had agreed to continue to  provide health insurance and pensions to those other two workers, who by now had retired after long working careers.

Walter Reuther, leader of the United Auto Workers during the 40’s when employer based health and pension plans gained their initial footing, accepted employer plans in part because he thought that they would place the auto companies and suppliers at a competitive disadvantage over the long run and the employers would come around to accept the necessity of a government sponsored plans.  He underestimated the ideological rigidity of the employer class.

If, domestically,  companies do not compete on a level playing field as a result of an inequitable financing of health care costs, that affect is even more dramatic in the international market place.  Health care costs in the United States are significantly higher than the average for the rest of the industrialized world.  So an American company whose costs are “average” already starts out at a competitive disadvantage.  A company with a disproportionate share of society’s health care costs, for example an auto or steel manufacturer, is even more disadvantaged internationally.

So the key to restoring a level competitive playing field, where companies compete based on their core competencies, is to devise a system where no company bears a disproportionate share of the health care costs.  By way of illustration, in Germany the federal government pays the cost of insuring the dependents of workers.

The current system of health care financing distorts the job market

This occurs primarily in two ways.  Workers who “need” health insurance, heads of households for example, will try to find employment where they get health insurance coverage.  That becomes the driving motivator that keeps them in a job that may not be best the use of the skills.  Therefore because of an uneven and unreliable system of financing health care costs, the market place for jobs is not facilitating a optimal match of skills needed with skills offered.

From the employer’s perspective, the current system of health care financing generally requires a fixed cost per employee regardless of hours worked.  This limits the employer’s flexibility.  It may be more economical to require overtime, than to hire an additional employee.  Likewise, decisions about concepts like job sharing, employee contracting, part time employment, phased retirements, and other flexible work arrangements are made much more difficult by the nature of health care financing in the United States.

Equitable financing of health care would increase the flexibility of  employers in their hiring decisions and and find the best employees for the positions available.

The current system of health care financing stifles market creativity 

Any time that freedom of choice is circumscribed, creativity is stifled.  I often wonder how many business ideas were never brought to market because the idea person felt tied to his or her job fin order to keep their health insurance.   

The irony is that freedom of choice is one of the reasons why employers, historically, have backed the current health care system.  They have elevated freedom of choice in a non-core business function above freedom of choice and flexibility in their core business.

If the new Obama administration wants to leverage the impact of any economic stimulus package, it can unleash the creative energies of both employers and employees by coupling it with a major reform of the health care system.  

There is one additional argument for linking health care reform to an economic stimulus package. If done right, it can save the economy billions of dollars that can be spent better.  That is a topic that too self evident to belabor.


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