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.
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.
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