Monday, October 28, 2013

Employer-Provided Health Insurance: A Uniquely American Blunder


Most Americans nowadays--myself included--get health insurance through their employers. At last count, about 60% of non-elderly Americans obtained their insurance this way, although that number has been falling for years and shows further signs of dropping--in no small part due to some of the provisions in Obamacare. I'm sure some of you have no doubt read stories about how companies like Walgreen's and Trader Joe's are dropping employees from their health plans and pushing them into the health insurance exchanges. And contrary to popular belief, that's a very good thing. Indeed, health policy wonks from across the political spectrum--from Milton Friedman to Austin Frakt--are very much in favor of completely eliminating employer-provided health insurance (EPI). 

And why shouldn't they be? No other industrialized country does it quite like this. If we're being honest, the system of EPI wasn't devised as some carefully-crafted public policy--it was basically an accident brought about by wage controls during World War II. Basically, what happened was that these wage controls were put into place by the National War Labor Board, which set a cap on all wage increases. But there was a loophole: the caps didn't apply to employee benefits. So employers started competing for labor on the basis of health insurance plans instead of higher wages. Then, the IRS made it even more explicit in 1954 when it declared that employer-provided health benefits were not taxable. And the rest, as they say, is history, with EPI being subsidized by taxpayers to the tune of around $300 billion in 2012

But as I said before, this system is uniquely American, and it is also uniquely problematic for a wide variety of reasons. First and foremost, it makes opaque a system that, like all other things in a market economy, would benefit greatly from a healthy dose of transparency. Specifically, it masks who actually pays for an employee's health care, which makes employees less cost-conscious when consuming health care (you always spend more when it's other people's money, right?), which in turn drives up health spending. Furthermore, employers, rather than employees, are choosing health plans for a large, diverse group of people with varying health care needs, while at the same time the actual costs aren't readily visible to people on these plans. As a result, the rising costs of health care due to this over-consumption and lack of cost-consciousness has created a situation in which wages are depressed in order to continue paying for health insurance that, oftentimes, includes coverage for things the employee doesn't even want or need. This graph should prove helpful to explaining my point:



In addition to depressing wages, the existence of EPI creates a situation where employees are reluctant to quit their jobs (job lock, in wonk's parlance) to, say, start a new business or find a job that better suits their skills--because they'd lose their insurance. One study found that employee turnover was reduced by a whopping 25% because of this! On a more practical level, changing insurers every time you change jobs--and the resulting change of health care providers that often follows--also makes for much poorer quality of care because it makes health care coordination and early diagnosis that much harder. It also costs more, to boot. To be sure, the Affordable Care Act does largely ameliorate the former problem; the latter one, not as much. 

Given such significant downsides to America's system of health insurance, why does it persist? At a guess, I would argue that it's a sort of status quo bias, where any change from the present state of affairs is seen as a loss, by both ordinary people and policymakers. As Milton Friedman once put it, we "regard it [employer provided insurance] as part of the natural order." Indeed, President Obama famously quipped "If you like your insurance plan, you will keep it. No one will be able to take that from you." Michele Bachmann complained that Obamacare will cause millions to lose their employer-provided insurance coverage. She's right about that, but this is one loss I won't be weeping over.