One of the problems with working in the realm of health care policy is that there are a lot of landmines on the path to reform, both political and technical in nature. So many of these obstacles are government created — from the big entitlements to state and local regulations — but one hurdle many people don’t think about is employer-provided health care.
Over half of all Americans get their health care coverage through their employer. Since it’s been that way for decades, folks tend to assume it’s a natural creation of the free market. What’s more, a great many of the people who get their health insurance as a perk of the job are pretty okay with that and certainly don’t see employer-provided insurance as a problem.
So here’s the short story of why employer-provided insurance isn’t natural, and in many respects is holding back patient-centered health care reform.
A brief history of the employer health care tax credit
The reason that employer-provided insurance looms so large in the private insurance market is because of a tax incentive that dates all the way back to World War II. In the midst of the war, the government imposed strict wage controls on many industries in an attempt to tamp down on the costs of war goods. But wages are one of the prime ways for companies to compete for higher quality workers.
As a result of these wage controls, companies turned to alternative ways to attract the best workers. And it turns out, the health insurance and other “benefits” didn’t count as “wages” for the government’s purposes. In fact, businesses figured out that they could deduct money used towards providing these benefits as a business expense in their taxes. For its part, Congress not only turned a blind eye to this practice, it formally encoded the deductibility of employee health benefits into the tax code in 1954.
From that point on, a company would have been foolish not to include health benefits as a part of its offers to prospective long-term employees. Not only were health benefits an attractive selling point on their own, paying the equivalent amount in wages would have subjected both workers and employers to the exorbitant income and payroll taxes that the uber-progressive Roosevelt administration left behind.
Why employer health insurance is not the awesome thing you might think it is
So the dominance of employer-provided care in the American market is largely an accident of tax policy. Yet, to be fair, if have a long-term, stable job with full health benefits provided by your company, this model is pretty cool. So why is it a problem?
What if the company goes under? What if you really would rather change jobs, but your child has an expensive condition that might not be covered under another company’s plan? Or your company’s version of a health “benefit” is to provide you an HMO plan where the insurer gets to dictate every bit of what doctors you can see and what treatments you can get?
What if, instead of your employer benefit, you’d rather have that same amount of money to invest in a private insurance plan of your choosing, and maybe (if your chosen plan is less expensive) something else? What if you don’t believe in some of the medical practices your premiums help cover, like abortions, and you’d rather opt for a different model of care entirely?
Well, if you opt out of your employer’s benefits, good luck. Your insurance costs and most of your health care costs on the private market aren’t tax-deductible. It’s like taking an enormous pay cut.
In addition, the modern economy increasingly doesn’t accommodate the kind of close company ties that made employer-provided insurance so popular. Younger workers are switching jobs more often, and innovations in technology have led to the creation of a broad “gig economy” where more people are self-employed or work contracts and odd jobs for multiple employers.
Incentivizing overuse
Worse, because employers would rather not suffer any more payroll taxes than necessary, they’re inclined to offer the best, most comprehensive “Cadillac” insurance plans possible rather than simply paying employees more. These super-expensive, low-deductible, nearly zero-copay plans create an incentive for people to be totally unrestricted with their consumption of health care services. After all, their insurance company pays all the bills, so if out-of-pocket cost for a given procedure is only $20, who cares how much it actually costs?
Overconsumption of health care is only the beginning of the problem created by an abundance of insurance plans that make health care seem “free” to consumers. Without the market forces created by customers comparing prices and trying to find the best value for good quality service, the price of health care is left mostly to negotiations between third-party payers and hospitals and doctors. Add in the costs imposed to health care providers by stingy government services like Medicaid, and private insurers become locked into a constant dance with hospitals to offer lower compensation for higher charged costs.
Individuals who don’t like their employers’ choices of care, who don’t have the employer option at all, or who don’t want to go through insurance for whatever reason, are left to deal with prices of care that are geared towards getting the most out of insurance corporations and the government. For many services, those are prices which many individuals cannot possibly afford.
This is not a functioning free market and hasn’t been for at least a couple generations.
Towards a free market in health care
These gold-plated insurance plans wouldn’t cease to exist in a fully free market, but given the option between an excessively generous insurance plan and keeping some of that money for other purposes, many people would certainly choose the latter. Rather than $10,000 worth of “free” insurance, some employees might prefer to have that cash to shop for the amount of covers that best suits them, in a competitive market.
One crucial step towards this is to allow a competitive individual market to exist in the first place. That means repealing all of Obama care’s regulations on what services every insurance plan must cover and what insurance companies are allowed to charge to which customers, and all the rest. In the digital age, it is hard to imagine that private websites would not step in to ease the process of choosing a plan in place of the existing healthcare.gov interface.
And then you allow individuals to keep more of their own income to purchase the health coverage they want tax-free, just like companies do. The large majority of political support in Republican circles appears to lean towards providing this relief through insurance premium tax credits (Speaker Paul Ryan, R-Wisc. (F, 51%) and HHS Secretary nominee Dr. Tom Price, R-Ga. (D, 62%) both back this approach, among others).
There are a multitude of problems with this approach in my view, which I’ll get into in its own article about why tax-deductible contributions to large HSAs are a superior approach. Regardless, the aim is to allow consumers the maximum amount of choice and flexibility in acquiring coverage. What consumers demand will go a long way towards determining whether employer-sponsored insurance remains the avenue for health care access for a majority of Americans.
Free markets aren’t predictable, and politicians hate risk
The fact is, no one knows exactly what the market response would be to leveling the playing ground between individuals and employers in buying health services. Will it lead to employers just dumping their workforces into the markets? Probably not, but it’s not impossible. The thing about individuals and service providers acting within a free market is that their behavior is never fully predictable. But the beauty of it is that demand also sparks innovation, and individuals who are able to keep more of their own money to buy the care they need are likely to encourage all manner of avenues for providing access to health care that aren’t common or even extant right now.
But politicians naturally hate uncertainty. Uncertain outcomes that don’t go as well as they hope can lead to bad elections for them, so their incentives are always to create more rigid guidelines, less freedom of choice. Conservatives must be on guard for this tendency. They mustalways push for health care reforms that emphasize breaking down barriers to free markets instead of merely setting up another, slightly more benevolent, set of guidelines that merely makes government-granted health coverage work slightly better than Obamacare.
It may very well be that a free market approach dramatically reduces the role of employers in the American health care system over time. Transitioning from a government dominated marketplace to a system that is more patient-centered and market-oriented will involve substantial change. But maintaining the government-created insurance model that priced many Americans out of affordable health care even before Obamacare would keep the momentum on the side of the progressives, sliding inexorably towards total government control. (For more from the author of “Why Job-Based Health Insurance Is Terrible for Americans’ Health and Wallets” please click HERE)
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