Lessons from Scotts Miracle-Gro

Sunday morning's Weekend Edition show on National Public Radio had a story about a former employee of Scotts Miracle-Gro who is suing the company after it fired him for being a smoker. Scott's policies are also the cover story of last week's issue of Business Week ("Get Healthy -- Or Else").

If this doesn't convince us that we need to get employers out from between people and their health insurance, I don't know what will. If we expect employers to bear a large share of the burden of health insurance costs and administration, we can't complain too much when they try to pull (grasp?) at more levers to control those costs. (Indeed, part of the argument for keeping the current system is that employers are "smart buyers.")

The problem is, they reach a point where they can't squeeze out any more efficiencies through furthering tinkering with benefit design and supply chain management. Inevitably, they have to start trying to influence demand for healthcare, and they can't do that without plunging deeper and deeper into the private lives of their employees.

Employers are starting to realize that they've "hit the wall." Sometimes this manifests itself in hare-brained schemes, like Wal-Mart's Dossia PHR project. It's now escalated to the point where they too want out of the health benefits business entirely, and they're willing to ally with their adversaries to do it (witness the joint proposal from Wal-Mart and the largest union in the country to do away with the current health care system by 2012 -- "Better Health Care Together").

We've heard many times about how US-nameplate automakers spend more on healthcare than they do on steel. The cost argument doesn't bother me that much, frankly, because even if we moved away from an employer-based model, the costs would flow back to them in some way anyway. If we provided it through the government, as many other industrialized countries do, corporate taxes would undoubtedly go up to pay for a share of this. Taxes on individuals would go up as well, which would reduce disposable income, thereby reducing demand for cars, and ultimately cutting revenues to the automakers.

There is obviously inefficiency in forcing every company to become expert in optimal benefit design, but in a reasonably efficient market economy like the US, the "general equilibrium" result would be that corporations would for the most part end up close to where they are now economically. At the end of the day health care has to get paid for, and those costs can't get shifted away "cost-free".

So, while employers couch the need for change in terms of cost, I don't think that's why we should change the system. It's not the cost to businesses that is the most pernicious aspect of our employer-based healthcare financing system, it's the cost to all of us of having businesses become social engineers. If you don't think this is real, think about this: Scotts requires its employees to "pee in a cup" to test for nicotine. Urine tests to check compliance, not with the law, but with company policies.

The attorney for the former Scotts employee says that the company shouldn't be permitted to fire smokers, because of the slippery slope effect -- first it's smokers, then it's obese people, drinkers, motorcycle riders, and mountain-climbers. His solution is to disallow employers from doing this.

He's right, of course, that these lines are hard to draw. But companies need to have some levers to control costs. They could, for example, do other things short of firing smokers -- deny them access to health insurance benefits, for example, or make them pay the difference between a non-smoker's premium and a premium that accounts for their greater actuarial risk.

I'm all for compelling people to pay the extra cost of risks brought about by their voluntary behavior; it's economically efficient and fair. The real point though is that regardless of whether your employer's policy is to fire you or just charge you more, they still have to make a judgement about whether you belong in the high-risk category in the first place. And the more such risk-adjusted refinements they try to pursue, the more they need to know about the intimate details of your life outside of work.

In this way, employer-based insurance virtually forces companies to encroach on their employees' privacy. That, more than anything else, is why we should get rid of it.