Why Don't Big Firms Fire the Sick?
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.
Once you know these facts, populist complaints about health insurance companies make less sense than ever. If you work for a big firm, your insurance company has little or no incentive to drop you. But your employer does. So why do insurance companies endure almost all of the populist abuse? Once again, we face the case of the dog that did not bark.
The simplest answer is that employers rarely succumb to the temptation to fire the sick because they want to protect their reputations. Firms offer health insurance packages to attract workers. If workers expect to lose their jobs if they ever contract a serious illness, it’s going to be hard to recruit workers in the first place.
The funny thing about this response, though, is that 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.
Of course, if you already believe that health insurance companies jealously guard their reputations, you might conclude that even a watered-down version of this motive is sufficient to keep big firms honest. But if you don’t think reputational incentives work well in the insurance industry, if you take populist complaints seriously, you should expect big firms’ behavior to be even worse. Either way, populists’ focus on health insurance companies seems misplaced. Anyone care to defend them?