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McKinsey Thought-Experiment: What If They Are Correct?

I’m not going to do this with graphics (at least for now), but the finger exercise seems intuitive.

Assume—against all evidence—that the “once we educated them, 30% said they would stop offering health insurance to their lowest-paid employees” study is accurate.

How does that, as John Boehner declares, cost America jobs?

From Boehner’s site:

At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.

This should be intuitive. If the company is paying $1,000 a month for my family’s health care along with my $800 a month,* it can raise my paycheck by $1,000 a month—employee compensation is employee compensation—and cut back on its health care administration. If I’m not a health-care administrator, it’s win-win.**

Aside: Reality will interfere. If we make the Baumolian assumption that cost of health insurance will continue to grow faster than GDP—at a slower rate, probably, but still faster—I’ll give you odds that the labor share of revenues will decline, cet. par. over time. But we’re talking about jobs, not profits.***

Any economist worth her salt should know that lower costs of employment increase overall employment (assuming there is not a demand-side problem).

If the McKinsey “study” were accurate—again, not the way to bet—we should expect overall employment to increase. As with the Earned Income Tax Credit, the expansion of HIEs will benefit firms, allowing them to reallocate capital into more useful areas.

The follow-on effects in that universe: more people joining the HIEs than expected, improvements in the measurement of “real” wage growth, greater transparency in the current health-insurance system, and arguably a larger contingency of workers demanding something closer to a single-payer solution,**** all improve efficiency and provide opportunity for economic expansion.

Which is supposed to mean more jobs, not fewer.

If the McKinsey presentation accurately reflects what companies will do given the opportunity—think the Wal-Mart Effect Writ Large—then the prospects for employment will be, if anything, increased.

Greater political pressure for cost-reduction that leads to single-payer becoming more politically viable is just lagniappe.

*Not the real numbers, of course.

**If I’m a Benefits Coordinator, I don’t lose my job, and I get to spend more time working on ensuring that the firm is competitive in other areas. If I were doing an economic model of this against employment, I would bet that the coefficient would be small but positive, so let’s be generous and assume it’s equivalent to zero, i.e., no effect on employment supply.

As an aside, this was in part the reasoning behind the Bear Stearns “bag of rubber bands, box of paper clips, go buy all your own supplies” thinking. It didn’t necessarily save on corporate expenses directly, but it meant not having to manage that area of inventory.

***If anything, the extra profits, cet. par., facilitate business expansion and more hiring. That the multiplier effect will not be 1:1 simply reflects what a poor social investment private corporations are.

****More people forced to use the HIEs=> more people demanding similar plans across state lines => more demand for a larger uniform baseline (especially as families move from state to state) => more interest in cost controls => greater need to control Administrative expenses => disequilibrium in service demand and supply => demand for service efficiencies that result in either single-payer or, at worst, unified Servicer processing.