Moving away from employer-based health insurance, incrementally


As the federal health reform debate demonstrated, there are many things broken in the current United States health care system. That’s why our system ranks among the world’s most inefficient. At the heart of the problem lies a factor not always discussed: employer-based health insurance.

Many modern health systems are outgrowths of World War II. The American system evolved out of the Roosevelt Administration’s wartime wage controls. In efforts to attract workers, however, employers began offering other benefits – such as health insurance. Unions forwent other potential bargaining points after the war, instead opting to maintain these health benefits.

Today, employer-based health insurance has spread well beyond unionized workers. The Minnesota Department of Health reports 57.2% of Minnesotans have health care coverage through “group insurance” granted through employers, though that number has fallen from 68.1% since 2001. Movement in recent years has been toward pubic insurance or no insurance at all. Individual insurance has hovered around 5%.

What’s wrong with an employer-based health insurance system? Plenty. For one, it means in economic downturns, when unemployment goes up, uninsured rates will, too. For another, it either depresses wages or hurts businesses – “Those companies that offer the best plans can end up being the least competitive,” Gay Burke writes. “And ultimately, if they are not competitive they will go out of business.” In our globalized world, this is a countrywide disadvantage, according to The Realignment Project. The system “creates a competitive disadvantage for U.S. companies versus companies from single-payer countries” who don’t have health benefits on their balance sheets.

Furthermore, our system offers a major disincentive to any would-be entrepreneurs. If you’re quitting your job to start a small business, you’ll either need to forgo health insurance for a while, or purchase it on the individual market, which will be more expensive. Why? Because the current system stacks the deck in employer-based insurance’s favor.

This is done through a few different mechanisms. For one, employer-based health insurance is treated as a business expense and therefore tax deductible, while money spent on the individual health insurance market comes after an individual’s income is taxed. Additionally, large employers benefit from a “buying in bulk”-type discount because they bring in lots of individuals at once, allowing insurers to spread risk. Thus, employer-based insurance is cheaper.

The Affordable Care Act, passed in March, chips away at these advantages. One mechanism is the “Cadillac Tax,” a surcharge on high-end employer-based health plans that attempts to make some employer-based coverage less alluring.  A second is the creation of insurance exchanges, which will allow individuals and small businesses to band together to purchase insurance and capture “buying in bulk” discounts. The Cadillac Tax will begin in 2018, while insurance exchanges will open for business in 2014.

Also important in the health care overhaul is next year’s requirement that employers disclose the value of an employee’s health insurance on that employee’s W-2 form. This value could be going toward wages. Right now, “With the employer footing a big chunk of insurance cost, employees are not asking for the plans that minimize the combined costs of insurance and health care – they want plans that push the greatest percentage of their costs to their employer,” writes Burke. Seeing this cost explicitly will help individuals recognize that reducing it should translate into higher wages.

Even so, we must realize these are only incremental changes and not fundamental fixes for our broken system. In reality, that’s not surprising. There’s a reason President Obama kept saying, “If you like your current health care plan, you can keep it” – in the current environment, it wouldn’t be politically viable to say otherwise.

There’s a good reason for that, too: most unions negotiated hard for their health benefits, eschewing other potential benefits they could have sought instead. To suddenly make a major policy move against employer-based health insurance would be unfair to them. As The Realignment Project explains, “What unions fear is… the huge amounts of money saved by their employers will be diverted into corporate profits… All of that sweat equity, built up by generations of workers who fought long odds and desperate battles, could vanish, leaving union workers with less than they had to begin with.”

That’s why incremental change is a good thing. Still, with small changes, it is important to recognize they are but first steps down a long road to reform. The Affordable Care Act might be a health reform victory, but we’ve won the battle, not the war.