Why Don’t Employers Fire the Employees with High Health Care Costs?
This question is posed by Bryan Caplan at Econlog. He explains:
My friend in the insurance industry once let me in on a little secret: De facto, though not de jure, virtually every big firm is also a health insurance company with an exclusive clientele: Its own labor force. Once a firm is big enough, orthodox “health insurance companies” just charge the firm a fee equal to all its employees’ health care costs plus a handling fee. Big firms aren’t buying insurance from insurance companies; they’re subcontracting their paperwork.
Once you understand how the system works, there’s a surprising implication: Firms have a strong financial incentive to fire chronically unhealthy workers. Indeed, they have a strong incentive to fire perfectly healthy workers with chronically unhealthy family members. Big firms can’t shift their employees’ health costs onto a third party; they are the third parties. The marginal cost of a worker isn’t his salary plus the cost of an insurance premium; the marginal cost of a worker is his salary plus his (and his family’s) actual medical expenses. Any worker who costs more than he produces is a losing venture.
I would only add that the incentive for small firms to dump their highest cost employees is almost as great because they don’t have real insurance either (but that’s another story). After pondering whether firms worry about their reputations and how it would affect their ability to recruit new employees, Caplan adds this gem:
Firms have much better excuses to dump the sick than straight-up health insurance companies do. Your employer can always say, “I’m not firing you because you’re sick. I’m firing you because of the low quality of your work.” A health insurance company has far fewer credible excuses; all it can do is debate the fine print in your policy.
What do you think?
As John Goodman commented at econlog in response to this question, employers cannot legally fire someone because he is sick in order to avoid paying medical bills.
Caplan is focused on large employers.I think the problem is far worse for small employers. One sick employee can cause a small employer’s premiums to sky rocket.
Give it time, John. We may be getting there.
Most firms that self-insure have a stop-loss policy to cover any individual’s costs that exceed a certain level (and total costs that exceed a certain level). These stop-loss policies may alleviate the temptation to find reasons to fire workers with costly medical bills.
However, health benefits are a portion of a worker’s compensation package. I can understand the temptation to layoff workers whose total compensation exceeds their productivity. I had a friend who provided employee coverage to his workers at a firm he used to own. His premiums were prohibitive and rising. He later discovered that many of his workers had declined to enroll in the (subsidized) company health plan. It was one person (an office manager who purposely concealed the number of employees participating in the health plan) that was costing him a fortune.
That’s an interesting perspective. If I owned a large (or small) business, I can see how this would create problems.
At the end of the day, the problem is that we shouldn’t have our health insurance tied to our job.
But, even if a really sick worker received insurance via another source, he/she would still be racking up sick days or taking time off to help with family members.
The reality is that sick people can’t work as much, so they won’t be as productive as healthy members of the workforce.
I’m lucky because I’ve never had a major medical illness, but I can see all of the pressure it could put on fellow coworkers and the business.
I agree with Robert Book’s comment over at Econlog, who pointed out that workers with expensive medical claims pay for them through lower wages. This accords with general economic understanding that it is harder to shift costs than laymen assume. It’s also specifically supported by thorough emprical research in specific instances, such as the maternity mandate (which I discussed in a paper titled “From Heart Transplants to Hairpieces: The Questionable Benefit of State Benefits Mandates”, published in 2008).
The legal risk of “lasering” a high cost employee and firing him would be significant. A firm can miminize the risk by not hiring an employee likely to have higher risk of unexpected health costs (but I don’t know how it could execute this) for which “discrimination” is much easier to hide than after they’re hired.
Also, an employee with high medical claims might be more productive than another healthy employee who is less skilled or diligent. It would be hard for an outside researcher to measure this.
Finally, Prof. Kaplan asserts a “litle secret” to large-group coverage that is not at all mysterious. Self-insurance is “de jure” as well as “de facto”: It’s recognized by the Employee Retirement Income Security Act (ERISA) and settled by a long record of case law.
Devon is correct about stop-loss insurance. My company has a client who currently is self-insured and looking to go fully-insured but they have a single claim in excess of a million dollars so the traditional carriers will not touch this group but the owner is able to pay for this employee’s treatment due to the stop-loss.
It is also true, that a small business, with fewer than five employees, is exempt from employer mandates regarding the Americans with Disabilities Act. They can fire a sick person based on performance at will.
John, the way you avoid employees with health problems is to have a healthy behaviors regime that makes employees feel uncomfortable if they don’t engage in healthy behaviors. If you encourage thinness and fitness and abstinance you will tend to attract employees with those charcteristics.
If current and prospective employees view the employer as the insurer — which for large companies, they surely do — then to not provide care to an employee (or employee’s family member) to avoid costs would greatly diminish the attractiveness of the employer as a place of employment.
In that case, the employer would have to pay higher than average wages to attract workers. The higher wage payments might more than offset any savings from reneging on medical claims.
what is your child is victim of a gunshot to the face and it is very costly plus future surgey necessary after 5 because he has to mature to reconstruct inside damage like gum and teeth. a messed up teen took several qualities of life from him supposed to be accident but you dont aim and shot. now all you money worshiping wrong God you better make sure you treat others as you would like to be treated so much uncompassionate selfish greedy people The Lord will bring us out of bondage give and ye shall be given hord it and you will never take it with you no uhauls follow hursts. what is wrong with people get right before its to late. freak accident left a mother to witness victims of a crime and help them so the abuse will stop. emploers want to fire you so you cant take care of finishing your childs health. i feel for all who have sick children worst thing to ever go through you wish it was you instead. use your heart then if you have christ you will know we are to help the least of these. thats alot of points in heaven u cant serve two Gods oh mighty dollar any muti billion corps they sold there self to the devil you can prosper and be human and love your fellow man . in my sons case its over its on you messed with a highly favored child because when u follow him you will be favored . cutting from the bottom the little people everything they can to ensure they still make their massive paychecks and dont do shit but dwell on cost cuts that will never affect them. sadly the truth and it will set you free amen
THAT IS THE TRUTH I AM FACEING JOB LOSS BECAUSE I AM SICK I HAVE BEEN A TECH AND HELPED PEOPLE FOE MOST OF MY LIFE I HAVE WORKED SO MUCH OVER TIME THAT I HAVE HURT MY HEALTH NOW WHEN I NEED TO BE PUT IN A DIFFRENT POSTION AT WORK THEY WILL NOT HELP ME PEOPLE BETTER OPEN THERE EYES AND START CARING ABOUT THERE WORKERS THERE BUSSNESS WILL NOT LAST WITH OUT WORKERS AND THEY CAN NOT TAKE IT WITH THEM WHEN THEY LEAVE THIS WORLD THEY ARE MONEY HUNGRAY AND THATS ALL THEY THINK ABOUT IT IS SAD
My husband is being forced out of his position right now, that is why I searched for this type of article. he was fine while we were on cobra from his previous company, he was revered. Then, they transferred him two times back and forth. We now believe that was because they wanted to see who was the source of the high medical bills. By transferring him, they found out it was him (it is actually our son). So, once they made that determination (they transferred him at the tail end of the year – october, november, december) – they were able to see the purchase of medical supplies before the year ended. Once they did that, they all of a sudden claimed he wasn’t doing his job. All efforts toward excellence are ignored. He is underpeforming yet he is not. He works 80 hours per week doing each and everything on their development plan, and they claim he is not performing. Funny thing is that individuals in the same position, who don’t have these medical expenses, are insulated from the type of expectations that he is experiencing. They even tell them not to worry about their development plans. They let them slide and, in one case, they encouraged the person to ignore all responsibilities, let the place go down the tubes and then, they transferred him from his location, where everyone was trained well by him and the facility was clean and well maintained to someone else’s location where they were told to ignore their development plan. Now, he is being charged with all the things that were let go by the other manager and that person is off living it up at another location. It is all about the medical bills as this company is self insured entirely. They even offer incentives ($1400) if you and your spouse take a blood test and physicals (so they can get rid of you if you have high cholesterol, bp etc.). One guy fell for it, took the $1400, had high cholesterol and then got the same development plan that my husband did (it is funny how the development plan is the same for everyone they want to get rid of) and they fired him at 60 days into the plan.
I know for a fact this happens. I am a high level employee in a family owned company of about 300 people that is self insured. They have fired over a dozen people in last five years because of high health care bills by either the employee or a family member and they freely admit to what they are doing. I wish I knew if this was really illegal and who to report them to because I would in a second.