Opinion

Edward Hadas

AOL, solidarity and health insurance

By Edward Hadas
February 19, 2014

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.

Comments
7 comments so far | RSS Comments RSS

I live in a country where medical insurers and employers cannot discriminate against people who are ‘expensive’. It has been mostly a non-issue as most companies force all their employees onto medical insurance and thus the cost gets split amongst the entire insurer’s base as they must charge a single premium to all members and cannot ‘risk underwrite’ specific employers. As the medical insurers have very strong buying power they have managed to keep the cost of medical care reasonable compared to the US.

Posted by BidnisMan | Report as abusive
 

If we are not going to have socialized or one-payer, then we should work to remove employers from the healthcare business. They have far different goals when dealing with the insurers than individuals and it changes the form of competition. Especially when big corporations handle their own healthcare. I think all people should buy their own healthcare directly from insurers just as we do with home owners and auto insurance. True completion would drive down the costs significantly. Why isn’t this the case anyway? How did we get so screwed by our employers?

Posted by tmc | Report as abusive
 

“AOL should probably have bought more insurance to cover its exceptional expenses.” Yes, Tim Armstrong and the executive team made a business mistake in not purchasing sufficient reinsurance. But like the vast majority of CEOs rather than take responsibility for his mistake, he sought a scapegoat (the pregnancies). The other part of his avoidance of responsibility was to make employees pay the price, rather reduce his own massive compensation for having made a mistake. Not that dropping his compensation couple of million would have made any noticeable change in his lifestyle.

For many overcompensated CEOs, obtaining a mastery of scapegoating and avoidance of any true consequences of mistakes, were essential steps in climbing the ladder of corporate politics.

Posted by QuietThinker | Report as abusive
 

“True completion would drive down the costs significantly”

Many health insurance markets are too small to have anything like free-market competition, even theoretically. Also: how is every consumer of the inherently complicated and technical world of insurance contracts going to get the perfect information required in order to make rational choices in a free market? In a word, they cannot. Therefore we have regulation and pooling in national systems to take care of the details.

“How did we get so screwed by our employers?”

I think the good people of the USA screwed themselves by attaching healthcare to their firms, rather than originally going for a single-payer system like those that work relatively well for the rest of the world.

Posted by Benny27 | Report as abusive
 

But @Benny27, the insurance policies were geared for corporations to buy, not people. It took Obamacare to make the policies more palatable for people. As for the complexity of policies, that’s what regulations are for. Home owners insurance, banking policies, all are really to complicated for the average Joe to understand. Why should this be different? And as for small markets, yes, they are small now because insurers only have to score a few corporations to take over a market in a given area. Again, if policies were sold directly to individual, competition would change and perhaps more players would offer better policies. Hospitals and other providers would have to change how selective they are by actually publishing prices. Cost would go down. If we are going to have a capitalist/market based health care, then why not sell it to the actual consumers?
Personally I would much rather see a single payer system, but if it’s not to be then we should at least get the big corporations out of our healthcare.

Posted by tmc | Report as abusive
 

AOL falls down on multiple levels — many of which are not talked about enough. The writers and editors for Patch were plucked out from dead and dying local newspapers. They were promised a specific vision and, for a while, it looked like a credible possibility.

Then the psychology changed. The acquisition or merger of Huffington Post introduced the notion of free-blogging versus retained journalists. The comments sections stopped being manned by thoughtful readers and started to be filled by racists and fringies. Editors of a single site found they were now in charge of three, four, five regions, and the core idea of “hyper-local” became at best a misnomer, at worst a very tasteless joke.

The final insult is that many lost their jobs yet again, only temporarily spared from unemployment. But whereas they would have had their old articles in print to show for future jobs, most Patch contributors now find their years of work wiped clean from the internet. That work, when spoken to possible future employers, falls under “you’ll have to take my word for it,” which is pretty much how AOL ran that enterprise.

It is shameful because the core idea of the hyperlocal site, as Tim Armstrong originally intended, is a sound one. What he allowed it to become, one step at a time, is a farce. And the writers and editors who bought into the vision literally have nothing to show for it now. AOL seems so embarrassed for even trying,that they were fine with wiping out even that small legacy those employees who tried so hard.

Posted by DwDunphy | Report as abusive
 

It looks like these days employers and employees are too far apart in their outlook for them to be able to address a very serious problem, which is, that healthcare costs too much. Mr. Armstrong I am sure did not grudge the dollars spent on the babies, but yet at the same time felt it was his job to balance that cost over-run. His choice of how to do that may have been the wrong one and his method was certainly not tactful to say the least, yet here we are again, with no effective means of getting a hold on the tremendous cost of healthcare in the US. Obamacare has made some important contributions to the struggle, but it’s a far cry from what is needed to keep healthcare from continuing to put the real damper on our economy.

Posted by thinkb4its2late | Report as abusive
 

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