Health benefits at work--A review of Mark V. Pauly's, Health Benefits at Work. An Economic and Political Analysis of Employment-Based Health Insurance

Headnote

Key words: Health insurance; Employment-related benefits; Agency relationship.

JEL classifications: G22, J33, D82.

1. The Contents of the Book: Two Views on Who Pays for Health Insurance

Health benefits at work-the title of this book creates the expectation that the author will demonstrate the importance of employer-based health benefits for the profitability of business, the workings of the labor market, inflation in the health care sector, and the US economy as a whole, in particular through their effect on international competitiveness. After all, who would not recall the argument that health care costs add $1100 to every care made in America-the double of the $550 added to Japanese imports? This is what Pauly calls the `business theory', and he wants to convince his audience that it is wrong, that health benefits have none of the impacts listed above. This follows from the `economic theory', which states that both employers and workers are concerned with total compensation, regardless of whether it is paid out as money wages or as a fringe benefit. Already in the Introduction, the author cites evidence (Lewin-VHI, 1993) showing that 88% of increases in health benefits are offset by wage reductions, making total compensation approximately a constant.

In chapter 2, Pauly relates a meeting between President-elect Clinton and business leaders one month before Clinton's inauguration (i.e. in late 1992) in Little Rock, Arkansas. There, business leaders showed considerable enthusiasm for what was to become the Clinton plan. Pauly suggests that their failure to adopt the correct economic model caused them to back out later (for fear of profit losses), contributing to its early demise. He takes up this political aspect of his argument at the very end of the book.

Chapter 3 elucidates the economic view by emphasizing that a change in health benefits is irrelevant if both employers and workers treat money wages and benefits as fully substitutable, dollar for dollar. While this seems credible enough for the employer, does it also hold for the worker? It does in the case of a mandated benefit because changing employers will not do any good, conditions being uniform everywhere. The worker would have to drop out of the labor market altogether if (s)he dislikes the new mix of wages and health benefits-an...