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Ashish's Niti

Niti in Sanskrit means policy/strategy/vision. This blog hosts my political views, along with news and commentary. This blog has moved here.

Tuesday, August 24, 2004

Negative externalities in employer paid health insurance

Arnold Kling has an excellent post on employer "paid" healthcare insurance. He compares the situation with the hypothetical example given by Alex on minimum standard for dwelling. In both cases, employers (or landlord) pass on the costs to the employees (or tenants). Thus, employers and landlors act as a intermeditiaries.

The situation of employer "paid" health insurance is more akin to landlord providing hot water to all his/her tenants with no individualized billing. That means, no matter how much hot water you consume, you always get the average bill (total hot water charges for all the apartments/number of apartments) or it gets included in the rent. This simply encourages indiscriminate usage and thus has tremendous negative externalities. The same thing applies to health insurance through employers. Since, each of the employee gets to pay the same premium (as a reduction in take-home salary) irrespective of risk he/she poses (because of age, medical history, habbits and so on) there is tendency to overuse the medical care facilities. This drives up costs for everybody.

While everybody talks about negative externalities inherent in some private activities (such as factory pollution) nobody brings up the negative externalities created by Govt. incentives (favorable tax treatment of employer "paid" healthcare insurance).

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