AOL, solidarity and health insurance
The head of the American internet company AOL managed to say something really stupid a few weeks ago, and to sound callous at the same time. It’s a shame Tim Armstrong came off so badly, because he was trying to deal with a serious topic.
Armstrong was trying to justify the company’s decision, since reversed, to trim its employees’ retirement benefits. He started out at a disadvantage, because the chosen cutback was sneaky. A change that sounds innocuous, moving from monthly to annual employer payments into employee pension savings accounts, is actually a way to eliminate payments to employees who leave before the end of the year. It’s hard to look honest and upfront when explaining that.
But the former Google bigwig turned a disadvantage into a public relations disaster by bringing up the high costs of caring for two employees’ premature babies. The implied complaint about these million-dollar infants sounded heartless and invasive. In more humane hands, though, the Armstrong discussion could have been a fruitful one. The challenges that AOL faces are built into the way Americans arrange their employee welfare programs.
For most workers, their total remuneration combines payments that are supposed to be determined by what their labor produces and payments that are determined by some measure of their personal needs.
The pre-tax salary is totally in the first category, while healthcare benefits are almost entirely in the second. Pensions are usually somewhere in between. Defined contribution plans are more like salaries while defined benefits are calibrated by the presumed needs of a former employee who used to earn a certain amount.
In ethical terms, there are two standards of justice. The determination of salary follows the somewhat harsh rule of the market: this work is worth that much money. Benefits are set from a more communitarian perspective: we’re all in this together and it is just for us to take care of each other. This gentler reasoning of social solidarity determines that this person deserves that much money simply for being ill or old, or for riding a bicycle to work or for having expensive children to raise.
The two sorts of justice can be complementary, but the American choice to attach many benefits to jobs is potentially explosive. People being what they are, they tend to think they deserve, and thus need, more benefits. Employers, being what they are, resent the solidarity-based part of pay, which has little to do with the normal running of business. The resentment can turn into unease – or to Armstrong’s seeming callousness – when the payments are much more expensive than expected.
Most employers use insurance, which pools and amortizes payments, to smooth out the costs for the many employees who will bear the exceptionally high costs of a few. AOL should probably have bought more insurance to cover its exceptional expenses.
However, no amount of insurance can smooth away the basic problem. Even the most warm-hearted employers and insurers must temper their dedication to the common good. Without some discipline, claims and costs will rise inexorably.
American employers and health insurers can cut benefit costs by excluding as many sick people as possible from the insured solidarity group. AOL employees felt that Armstrong was picking on them for spoiling his plans for a healthy workforce by letting too many weaklings into the insurance pool.
Armstrong surely did not mean to give that impression, but any boss will be tempted. After all, a sickly job candidate would be at a disadvantage even if the employer had no liability for healthcare expenses. It’s a good bet that a healthier candidate will be more productive. Add in the potential cost of healthcare benefits, and it takes very strong management willpower not to think of the bottom line when considering employees who come, individually or with dependents, accompanied by high medical price tags.
It is a paradox. The more I care about my group, the more anxious I am to keep out weak outsiders. In other words, solidarity encourages selfishness. The paradox is built into any insurance model.
There is no easy escape. If employees pay their own expenses, the genuine advantages of solidarity are lost. If the government pays everything, as in the UK, it can create a sort of national solidarity, but it may also create a National Health Service, a monolithic monster.
Perhaps the best compromise is the most common European arrangement. Insurance is mandatory and the employers pay most of the cost, but they cannot negotiate lower premiums for their own employees. Nor can insurers try to select their customers. Selfishness is limited, solidarity is protected, and insurers still gain from keeping medical costs down.
Unfortunately, Obamacare does little to alleviate the solidarity-selfishness paradox. But in the unlikely event that the United States adopted a more European system, I think Tim Armstrong would be grateful.