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Is Employer-Based Health Insurance Worth Saving?

what is employer based health insurance

By Uwe E. Reinhardt May 22, 2009 6:05 am May 22, 2009 6:05 am

Uwe E. Reinhardt is an economics professor at Princeton.

Ask any group of health policy experts whether they would have put in place our employment-based health insurance system, had they had the luxury of designing our health system from scratch, the resounding answer most likely would be “No.” In fact, no other industrialized country has quite this arrangement. It is uniquely American in origin and in modus operandi.

Our employment-based system was not the product of a carefully designed health policy. It was a byproduct of evading wage controls during World War II.

At the time it was thought that, as the nation’s drafted military personnel risked their limbs and life on foreign battlefields at low, tightly controlled pay, those who stayed behind should have their wages controlled as well.

But with the wink of the eye with which Congress routinely puts loopholes into the tax laws or regulations it imposes, the wage controls imposed in World War II did not extend to fringe benefits. And thus, employer-paid fringe benefits, including employment-based health insurance, were born.

As was noted in last week’s post. Congress further encouraged the growth of employment-based health insurance by treating the employers’ contribution to their employees’ health insurance as a tax-deductible business expense. On the other hand, it was also not viewed as taxable compensation of the employee.

Remarkably, and quite unfairly, that tax preference was not granted to families forced to purchase health insurance on their own. They had to buy it with after-tax dollars.

From the perspective of employed Americans and their families, this model appears to have served them reasonably well. In opinion surveys, over 80 percent of the respondents typically declare themselves satisfied with that coverage. It can explain why Americans have grown so attached to that system and why so many politicians are keen to shore it up.

From the perspective of health policy experts, however, that approach has serious shortcomings.

First, it keeps opaque who actually pays for the health care used by employees.

Both employers and employees seem to believe that the “company” absorbs the cost of the employer’s contributions to the group health insurance premiums for their employees — typically 80 percent of the premium.

Employers believe that these costs must either be recovered through the prices of the goods or services they sell (i.e. passing along the rising costs of health care to their customers in the form of higher prices), or taken out of the return to the company’s owners. On that belief, American executives now complain pitiably that

the high cost of American health care makes their enterprises uncompetitive in the global marketplace .

For their part, employees tend to view employer-paid health insurance as a gift, on top of their pay. Therefore they see little personal gain in attempts to control the cost of their care.

Most economists are persuaded by theory and evidence that, over the longer run, the contributions employers make toward the fringe benefits of their employees come out of the employees’ take-home pay. Economists think of employers as pickpockets, so to speak, who take a chunk of the employee’s total compensation and buy with it whatever fringe benefits they “give” their employees. That process blinds employees to the inroads that their health care makes into their families’ livelihood.

A second major shortcoming of employment-based health insurance is that it is only temporary. It is tied to a particular job in a particular company, and it is lost with that job. Nowhere else in the industrialized world does a family, already down on its luck over a job loss, also suffer the loss of its health insurance. It happens only in America, under employment-based insurance.

Finally, the group health-insurance premiums employers pay to private insurers are “experience rated” over that employer’s group of employees. This means that the group premium is based on the claims experience – that is, the health history — of just that small group of employees.

For small employers, it can mean that if serious illness befalls one or several employees in the group, it can drastically and unpredictably drive up the premium for every employee in the group. Not surprisingly, only 49 percent of employers with three to nine employees sponsored health insurance for their employees in 2008, as did only 62 percent of employers with three to 199 workers (Exhibit 10 here ).

The objective of current health reform efforts should not be to abolish the employment-based system to which so many Americans feel attached, brittle and expensive as that system may be. Instead, the aim should be to develop a robust, parallel system of fully portable insurance that individuals or families can purchase on their own, in a properly regulated and organized market, with public subsidies where deemed necessary. As my earlier posts to this blog sought to explain, this can be done in a variety of ways .

The success or failure of the current efforts by President Obama and Congress to reform the American health system can be gauged by the degree to which that goal has been accomplished a year from now. If success in this regard serves to shrink the traditional employment-based insurance system, so be it.

Category: Insurance

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