The Senate Finance Committee hosted a huge panel of experts yesterday to discuss health insurance. The best testimony was given by Dr. Kate Baicker of Harvard, a former White House colleague of mine. I highly recommend you read anything Kate writes. I will crib from her testimony to link three concepts that I think mutually reinforce to contribute to our national problem of exploding health care expenditures. All three concepts fit under the umbrella of third-party payment — people spend more of other people’s money than they do of their own, and less wisely.

Here are the three concepts:

1. There is a tradeoff between employer-provided health insurance and wages. Health insurance provided by an employer looks less expensive to the employee than it is.
2. The tax code distorts compensation decisions away from wages and toward expensive health insurance.
3. Low-deductible health insurance encourages over-utilization of medical care.

I will take these one per day. The first one is the easiest.

Here is Kate on the first concept:

Employees ultimately pay for the health insurance that they get through their employer, no matter who writes the check to the insurance company. The view that we can get employers to shoulder the cost of providing health insurance stems from the misconception that employers pay for benefits out of a reservoir of profits. Regardless of a firm’s profits, valued benefits are paid primarily out of workers wages. While workers may not even be aware of the cost of their total health premium, employers make hiring and salary decisions based on the total cost of employment, including both wages and benefits such as health insurance, maternity leave, disability and retirement benefits. They provide health insurance not out of generosity of spirit, but as a way to attract workers  – just like wages. When the cost of benefits rises, wages fall (or rise more slowly than they would have otherwise), leaving workers bearing the cost of their benefits in the form of lower wages.

I’m going to create an example family, Charlie and Kelly Thompson, and their son Fred. In 2008 Kelly earned $60,000 per year, and Charlie $20,000, providing an annual family income of $80,000, which put the Thompsons near the top of the third quintile — their income was greater than that of about 60% of similarly-sized American families, and less than the other 40%.The Thompsons got a […]