This question is posed by Bryan Caplan at Econlog. He explains:
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.
I would only add that the incentive for small firms to dump their highest cost employees is almost as great because they don’t have real insurance either (but that’s another story). After pondering whether firms worry about their reputations and how it would affect their ability to recruit new employees, Caplan adds this gem:
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.
What do you think?