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It’s Not Employers Who Bear the Costs : Health care: We’re burdened by fallacies of the effects on small business and global competitiveness.

<i> Victor R. Fuchs' latest book, "The Future of Health Policy," will be published by Harvard University Press this month. </i>

Americans desperately need comprehensive change in health care, both to contain costs and to ensure universal coverage with equitable financing. This goal will never be realized, however, as long as the myth persists that health insurance is now paid for by employers.

Policy recommendations based on such an unrealistic assumption are likely to do more harm than good. Politicians, employers and others have a stake in perpetuating this myth, but there is no substance to it.

Take my case: I am employed by Stanford University and the university nominally “provides” my health insurance. But who really pays for it? The chairman of my department? The president? The members of the board of trustees? No, most of the premium undoubtedly comes from money that would otherwise be part of my salary.

Some of the cost may be passed on to students in the form of higher tuition. Some may be borne by the agencies that fund research grants and contracts. One thing is certain: Stanford does not pay for my health insurance in any meaningful sense. Much the same story can be told for all employment-based insurance, whether the employer is a nonprofit organization like Stanford, a branch of government or a for-profit corporation.

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Over time, the rising cost of health insurance inevitably reduces the potential earnings of workers or results in higher prices to consumers. Some observers claim that the costs of health insurance come at the expense of corporate profits, but there is no empirical support for that view. Net profits of manufacturing corporations, as a percentage of stockholders’ equity, were just as high in the decade of the 1980s as they were in the 1950s, despite huge increases in health-insurance premiums over that 30-year span.

The negative effect of rising health-insurance premiums and other fringe benefits on wages is readily evident. Between 1970 and 1990, total compensation (wages plus fringe benefits) per hour of work rose 12% after adjustment for inflation. During that same period, inflation-adjusted hourly earnings fell by 6%.

Why have fringe benefits like health insurance become such a large part of the total compensation package? The answer is clear. The fringe benefit portion of total compensation is exempt from federal and state income tax, Social Security contributions and other payroll taxes. Workers understandably prefer to get tax-free compensation when possible.

Once the myth of employer-provided health insurance is exploded, two other fallacies that muddy the current health-care debate become easy to expose.

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First, it is often asserted that small-business employers can’t afford health insurance. This emphasis on firm size is misplaced. It is true that most uninsured workers are employed in small firms, but that is because they are mostly low-wage workers. Many of the employed uninsured make less than $10,000 per year, and most make less than $20,000. They cannot afford to give up a substantial fraction of their wages to obtain health insurance. It is revealing that lawyers, accountants and other highly paid professionals who work in small firms usually do have health insurance.

Another fallacy is the claim that high health-care expenditures make U.S. companies less competitive in the global economy. That’s nonsense. Health-care expenditures have no more relationship to competitiveness than do expenditures for hotels or restaurants. If total compensation is high relative to productivity, the firm will not be competitive. That should be obvious. But the form of compensation--wages, health insurance or whatever--is irrelevant. A rise in the price of health care lowers the worker’s standard of living, just as a rise in the price of food or any other commodity would. But as long as total compensation is consistent with productivity, the firm’s competitiveness is unaffected. Food is more expensive in Japan than in the United States, but no one claims that the high price of food has made Japan uncompetitive in the global economy.

The release of the Clinton Administration’s proposal for health-care reform will probably touch off the most significant national debate we have seen in more than a generation. Because the health sector consumes one-seventh of the total economy, employs more than 10 million men and women and affects every American family, it is critical that the proposals and arguments be grounded in reality.

Advocates of alternative approaches to financing care and the organization of its delivery can legitimately debate significant differences in goals and means. That debate will be more productive, however, if all the participants abandon the myth that the cost of employment-based health insurance is borne by employers.

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