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Households pay for health care

Posted May 27 2009 10:40pm

Remember, no matter how we “pay” for health care, the money always flows from households.  Greg Mankiw makes an oft-ignored point when he writes that American business’ international competitiveness will not improve should they stop providing health care as a fringe benefit.  He cites the CBO (pdf):

Replacing employment-based health care with a government-run system could reduce employers’ payments for their workers’ insurance, but the amount that they would have to pay in overall compensation would remain essentially unchanged. Even though changes to the health care system could have various effects on the supply of labor, the underlying amount of labor supplied at any given level of compensation would hardly be affected by a change in the health care system. As a result, cash wages and other forms of compensation would have to rise by roughly the amount of the reduction in health benefits for firms to be able to attract the same number and types of workers.

Compensation could take some time to adjust to its market-clearing level (the point at which supply and demand are equal). During that time, firms that formerly provided health benefits—especially firms that employ workers under multiyear contracts—could experience substantial reductions in labor costs, which would boost their profits temporarily. But those firms would experience no permanent change in their competitive status.

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