04.17.14

Employer-Based Health Care – All Cons, No Pros

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Since the beginning of the debates around the Affordable Care Act (ACA), there’s been a relatively muted on-going conversation about the value of the employer based health insurance model. It has, however, never really come to the fore as the ACA never seriously engaged with the idea of canning the whole system and starting fresh under a new model. The history of the employer based health care system has been well canvassed elsewhere (This American Life, New York Times, LMGTFY) and I have no intention to rehash that material here. The question I want to discuss is, “Why is there any fidelity to this system at all?” It’s a system that is bad for consumers, bad for employers, and bad policy. No one wins in this system.

Below is a table of pros and cons to the employer based model. As my bias is clear that the employer based model is fundamentally flawed, I’ve taken the pros from the National Business Coalition on Health (NBCH) who put together a small post on the advantages of an employer based health insurance scheme

Pros Cons
Value-based purchasing Arbitrary risk pools
More Individuals Covered Lack of portability
Risk spreading Restriction of consumer choice
Economies of scale Ethical/Religious concerns re: complying with regulations
Reliable payment Unequal tax implications
Assures a competitive job market Inefficient administration
Enhances wellness Wrong consumer targeting
  Inefficient tax expenditure

 

While the list would appear to be equal, on closer inspection, the pros are actually quite illusory.

  • Value based purchasing is based on the premise that consumers are unprepared to determine health insurance needs and differences in plans, but that companies (apparently) are able to do this effectively. While there’s some evidence that people have misunderstood the health insurance products they previously purchased, the minimum benefits package requirements in the ACA effectively resolve the issue of under-purchasing.
  • More individuals being covered is an argument built solely on the legacy that most people currently have insurance through their employer and that they would be more inclined to “gamble” with health care coverage if they were in the individual market. There’s little evidence to support this proposition – and again – the health insurance mandate within the ACA, as well as easily established incentive schemes, could resolve these concerns.
  • Risk spreading argues that risk is lowered within a group insurance system, but this takes a micro view of a macro issue. At the health insurance company level, the risk is across all plans and policies insured, not at the individual employer level. There’s little societal value to enabling healthy people to gather together to insure themselves to the exclusion on sicker individuals. Risk spreading is good – it’s what the entire health insurance system is meant to accomplish – but a broader risk profile spread across the entire population of insured individuals is more egalitarian and less arbitrary.
  • Economies of scale argues that employers are able to extract discounts from insurance companies based on the size of the group being insured. Thus, an employer of 1,000 workers will get a lower premium package then an employer of only 10 workers for the same benefits package. This is obviously correct, but it’s also bad policy. It essentially establishes a system by which small employers are subsidizing the lower premiums of the larger employers. Why an employee’s risk pool should be arbitrarily determined by the size of their employer and the employer’s skill at negotiation is nonsensical and puts small businesses at a disadvantage with no justification.
  • Reliable payment argues that individuals are more likely to pay when money is deducted directly from their paycheck. This is, of course, true, but automatic deductions for all sorts of on-going costs (gym memberships, car insurance, student loans, rent/mortgages, podcasts, credit card payments, etc, etc) have been around for some time. 
  • Assures a competitive job market is also nonsensical. In fact, employer-based health insurance schemes are more likely to reduce competition within the job market if there’s anxiety in the workforce about changing insurance when changing jobs. Additionally, the health benefits package is a valuable portion of an overall compensation package, but – as noted above – consumers may not be particularly good at determining the value of these products. Greater transparency is introduced to the job market by reducing the complexity of the compensation package and reducing it to mere dollar figures.
  • Finally, enhances wellness is purely an assertion that having employers choose health insurance options for their employees fosters an environment in which employers are more likely to care about the health of their employees. There’s no evidence that employer involvement in choosing health insurance improves health outcomes. Companies would still be in a position to establish voluntary health programs (running clubs, etc.) and there is evidence that these sorts of associations are beneficial to employee satisfaction and worker productivity.

 The cons to the system are much clearer. 

  • Arbitrary risk pools – The employer based model pools population health risks based on an individual’s employer rather than on the general population. There’s no cognizant rationale that employers are an optimal place to group risk. 
  • Lack of portability – There’s little rationale that health insurance should have to change when one’s employer changes.
  • Restriction of consumer choice – Having employers make the selection of health insurance restricts employee’s choice.
  • Ethical/Religious concerns re: complying with regulations – This is essentially the Hobby Lobby problem. If the employer based health insurance system were deconstructed, health insurance would belong to the individual and employers’ objections could be removed from the equation entirely.
  • Unequal tax implications – Currently, employers get a tax exemption for contributing to employee health insurance and employee contributions to employer sponsored health care is paid pre-tax. However, individuals purchasing through the individual market are paying entirely with post-tax money. If the goal is to encourage access to health insurance, there’s no reason to treat these groups of individuals differently.
  • Inefficient administration – Having every employer privately negotiate premium rates with health insurance companies with little transparency in the negotiation process is wasteful of employer’s time.
  • Wrong consumer targeting – Right now, the bulk of the health insurance market is targeted at employers rather than the actual beneficiaries of the health insurance. The hope is that employers have the best interest of their employees at heart, but employers’ interests are unique from those of their employees. 
  • Inefficient tax expenditure – Using tax breaks to create incentives for employers to provide health insurance to employees is backward. It’s better to directly target the tax breaks at the actual consumer rather than the employer.

Even Governor Bobby Jindal’s Freedom and Empowerment Plan seems to recognize the issues with maintaining the current employer based model. Many of the ideas in that plan (Tax Equity, Pro-Life Protections, Better Access for Individuals Changing Employers, Pooling Mechanisms) are attempts to maintain the employer based model while finding ways to undo it’s flaws. Some of the ideas within the plan – Cross-state Insurance Purchasing in particular – would substantially worsen the issue of consumer choice within the employer based model.

So, what’s a better way forward? Clearly, there’s a transition process necessary given the entrenched nature of the employer based health insurance. Relatively simple fixes, however, could be developed that would enable employed individuals to purchase employer subsidized plans on the individual market. This could be done by changing health insurance benefits into a monetary contribution to the premium cost of insurance purchased by the employee in the individual market. As Jindal proposes, the idea of moving the tax exemption from the employer to the employee is a valid approach for improving the targeting and efficiency of tax expenditures. This would also undermine the concerns of Hobby Lobby that will be decided by the Supreme Court soon.

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The views reflected in this blog are those of the individual authors and do not necessarily represent those of the O’Neill Institute for National and Global Health Law or Georgetown University. This blog is solely informational in nature, and not intended as a substitute for competent legal advice from a licensed and retained attorney in your state or country.

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