What AOL's Tim Armstrong Got Right
Wonder why it's so hard to "bend the cost curve" in health care? Look no further than the universal freakout over AOL Inc. chief executive officer Tim Armstrong's recent remarks.
For those who haven't been following along at home, a recap: Last week, AOL Inc. announced that it was changing the way it handled its 401(k) match. Instead of putting the matching money in as workers put in their contributions, it would award the account-match dollars in a lump sum at the end of the year. Moreover, if you left the company during the year, you'd lose all of your matched funds.
Here's how Armstrong reportedly explained his decision:
We had a $7.1 million bill from the Obamacare act in general and we had multiple other things that happened at the company healthcare-wise. Two things that happened in 2012 we had two AOLers that had distressed babies that were born that we paid a million dollars each to make sure those babies were okay in general. And those are the things that add up into our benefits cost. So, when we had the final decision about what benefits to cut because of the increased health care cost, we made the decision and I made the decision to basically change the 401(k) plans because all companies are going in this direction, number one, and number two is it was a choice between having all the individual AOLers probably pay a couple hundred dollars a month in additional cost out of your paycheck or to basically have people who are leaving the company to not extend the benefit, which is a benefit, not all companies give 401(k) matching programs to people who are leaving the company.
The explanation of the decision-making process seemed basically fair to me. AOL probably self-insures, as most large employers do, though it was clear from the Internet commentary that most people aren't aware of that fact. If there were two "distressed" babies who cost $1 million apiece -- easily possible, as neonatal care, along with transplants and cancer, regularly tops the list of high-cost claims -- then AOL could very well have paid every dollar of those claims, even though the plan is probably administered by an insurer such as Aetna Inc. or Blue Cross Blue Shield.
What he said about the effects of changing the 401(k) match isn't exactly true, however -- it's not just people who leave the company who will pay. All the AOL workers who contribute to a 401(k) will miss out on gains they might have made over the course of the year, had AOL stuck with its old program. In a boom year, that could add up to thousands of dollars.
But relatively few people objected to Armstrong's misleading characterization of the 401(k) plan. Instead, the Internet went all atwitter at Armstrong for daring to mention that babies with special medical needs cost a lot, and that the money had to come from somewhere. The mother of one of the babies wrote a moving piece for Slate about her daughter's "catastrophic birth," which went viral even though it didn't actually seem to rebut anything Armstrong had said. Fei's baby is beautiful, and all of us are very glad that modern medicine was able to give her a shot at life she wouldn't have had 20 years ago. But Armstrong didn't say that he wished the babies weren't alive; he just said they were expensive.
If we actually want to bend the cost curve, this is one of the things we are going to have to say: Catastrophic births such as that of Deanna Fei's daughter cost an absolute fortune, and all that expensive care often gives those vulnerable babies less than a 50 percent chance at living a normal life. Organ transplants also cost the earth and have a tragically high failure rate. It would be nice if all of our rising health-care costs consisted of giving hip transplants to 94-year-old cancer patients on ventilators, but, in fact, a lot of the really expensive stuff we do are things that most people would like us to keep doing, such as saving preemies and transplanting organs into people who will die without them.
Myself, I think AOL made absolutely the right choice: saving Deanna Fei's baby, not 401(k) matches for job-switchers. But people seem mad at Armstrong for saying that this is a choice -- that the resources to pay for such babies do not just materialize out of some primordial miasma surrounding the maternity ward but must be redirected from something else.
I think that these are often good choices, and that we spend too much time obsessing about the percentage of gross domestic product we spend on health-care costs. The supermarket has whole sections devoted to shelf-stable lunch kits and things to make your towels soft. If we choose to spend more of our money on premature babies and less on those things, that seems like a good bargain.
But whatever we choose, we should do so consciously, weighing values against each other. Unfortunately, our emotional reaction to anyone who dares to mention our expensive choices makes it very difficult to have a rational conversation. AOL has reversed its 401(k) change, and it will probably look to make the money up in some other way. But when it does, you can be sure it will never mention that it has anything to do with insurance or expensive health claims. And AOL employees, and the rest of us, can go back to acting like it's a big mystery why health-care costs keep increasing.
(Megan McArdle writes about economics, business and publicpolicy for Bloomberg View. Follow her on Twitter@asymmetricinfo.)
Some people argued it should have come out of Tim Armstrong's salary, and fair enough, except that I'm guessing the distressed babies were an example of generally higher-than-expected health costs. But at any rate, this was by no means a universal argument; many people seemed to be simply horrified that he had said that intensive neonatal care is really, really expensive.
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