A few month ago, I wrote a post explaining why employer
sponsored health insurance (ESHI) has been called the original
sin of the U.S. health care system. This post now turns to some ideas for
escaping the ESHI trap.
Close to half of all Americans receive health insurance
coverage through their jobs. In no other major country is health care coverage
tied as closely to employment as in the United States. American-style ESHI has
three major unintended consequences.
- “Job
lock” makes workers afraid to move to a more suitable job, to become
self-employed, or to start one’s own business for fear of losing insurance
coverage.
- ESHI
is severely inequitable. Health insurance benefits are tax-deductible, but
the deduction is of greater value to people in higher tax brackets, and
higher-paid workers are far more likely to get health benefits to begin
with. Those in the top fifth of the wage distribution are
estimated to get ESHI benefits that are nine times higher than
those of the bottom fifth.
- The
existence of thousands of ESHI plans, some of them quite small, adds to
the fragmentation of the U.S. health care system and contributes to high
administrative costs.
Any worthwhile strategy for health care reform needs a
strategy for escaping the ESHI trap.
How did we get ESHI in the first place?
Although ESHI is nominally part of the private sector, it is
by no means a creature of market forces. It began during World War II when wage
and price controls made it hard for businesses to raise pay to attract new
workers. In lieu of higher pay, they offered in-kind benefits like health
insurance. Those practices became baked in after the war when health benefits
were declared tax deductible.
Because it allows employers to pay a part of their labor
cost as tax-deductible health benefits, the tax deductibility of ESHI serves as
an implicit wage subsidy. The carrot of the wage subsidy is backed up by the
stick of an employer mandate, which decrees that all firms with 50 or more
employees must offer ESHI. Although some employers might offer such benefits
anyway, for many others, cost of offering ESHI outweighs the value of the
implicit subsidy.
Any way one looks at it, it is hard to see any overall
public policy justification for a program that primarily benefits high-wage
employees while undermining labor mobility and adding to the fragmentation of
the health care payment system.
Transition tools
Yet, however desirable, the transition away from ESHI will
not be easy. In part that is because a strong majority of beneficiaries who
receive ESHI say they are satisfied with their coverage. In part, that is
probably because many workers have little chance of getting other coverage, have
no interest in changing jobs, or are on the favored end of the unequal
distribution of tax benefits. In part also, it may be because workers do not
understand that their cash wages would be likely to rise if EHSI were did not
drive up nonwage compensation costs.
Experience with the Affordable Care Act (ACA) shows that
reformers need to act cautiously in demanding that people change their health
plans. A transition that induced people to move voluntarily onto UCC because
they find it attractive would probably be more politically acceptable than one
that pushed people from ESHI to UCC by fiat. The ideal solution, then, would be
to make it attractive for workers to leave ESHI voluntarily, while allowing,
but allowing employers to phase out their ESHI coverage over time. Here are
some policy tools that could make that possible.
An affordable alternative for workers. The
first requirement for a smooth transition is to offer workers whose ESHI plans
are phased out, or who opt out of them, an alternative that is affordable and
offers comparable or better coverage. In previous posts, I have promoted some
form of universal
catastrophic coverage (UCC) as one such option. UCC would offer
individual and family policies with comprehensive coverage and with affordable
premiums and out-of-pocket costs scaled to income. The UCC policy itself could
be issued either directly by the government or, following the Medicare
Advantage model, by a private insurer, subject to appropriate guidelines.
The Medicare
for America bill introduced in the House by Representatives Rosa
DeLauro of Connecticut and Jan Schakowsky of Illinois would be one way of doing
this. Another path would be to add an affordable public option to the policies
now available on ACA exchanges, perhaps in the form of a buy-in to Medicare or
Medicaid. To make it as attractive as possible for individuals to opt out of
ESHI, those who do so should be allowed to take advantage of the full range of
ACA premium subsidies and cost-sharing reductions.
Inducements for employers. One obvious
way to encourage companies to phase out their ESHI programs would be to end the
employer mandate. Ending the mandate alone would not cause all employers to
drop ESHI in a rush, since many of them view health benefits as a useful
recruitment and retention tool. However, without the mandate, the gradual
decrease in the number of companies offering ESHI would probably accelerate. Already,
the number of employers offering coverage has fallen
by about a fifth since 2000.
A more aggressive inducement would be to phase out the tax
deductibility of ESHI. Doing so would encourage employers to offer higher cash
wages, rather than health benefits, as their principle tool for recruitment and
retention.
According to the Tax
Policy Center, ending the deductibility of health benefits would also
generate $178 billion in additional annual revenue for the U.S. Treasury. That
money could be recycled to support premium subsidies and cost sharing
reductions for low-income workers who opted out of ESHI.
Continued employer cost-sharing. Some
reformers worry that allowing large employers to end their ESHI programs would
give them an unwarranted financial windfall, which they would pay out to
shareholders or spend on management bonuses. Reformers differ in the way they
would address that concern.
Some argue that there would be no such windfall. They point
out that from an economic point of view, the costs of ESHI are a part of total
labor compensation. In deciding how many workers to hire and how much to pay
them, the total cost of compensation is much more important than the break-down
of compensation between wages and benefits. If the cost of benefits decreased,
the argument goes, employers would still be willing and able to pay the same
total compensation; they would just switch to a mix that included fewer
benefits and higher cash wages.
Others are skeptical that labor markets are sufficiently
competitive to ensure that reduced ESHI benefit costs would be fully passed
through to workers as higher wages. They recommend stronger measures to ensure
that employers do not gain unfair windfalls as ESHI is phased out. For example,
Medicare for America would require large employers who do not offer ESHI to pay
an 8 percent payroll tax. The tax would apply both to cases in which an
individual opts out of the employer plan, and cases in which employers drop
their plans altogether.
The bottom line
Everyone acknowledges that the U.S. health care system has
serious problems. Employer sponsored health insurance is one of the problems,
not one of the solutions. We need something better — some system that would
protect everyone against financially ruinous medical expenses while requiring
those who can afford it to pay their fair share.
At this point, the debate is less over what kind of health
care system we need than over how to get there. ESHI poses one of the biggest
challenges in achieving a smooth transition from what we have now to what we
want. If workers are given the choice of moving from employer plans to
something that is affordable and offers adequate coverage, and if employers are
encouraged to replace health benefits with better cash wages, such a transition
should be possible.
Previously posted at Medium.com. Adapted, in part, from a longer policy essay, Universal
Catastrophic Coverage: Principles for Bipartisan Health Care Reform.
Image by Clker-Free-Vector-Images from Pixabay
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