And How to Get Rid of It!
In the course of debate concerning American healthcare policy, rarely is it suggested that the employer provision of health insurance is anything but a good thing, but is it really?
In 2016 49% of all Americans, according to Kaiser Family Foundation (based on census data) who were not receiving health benefits through government Medicare, Medicaid, military, or VA programs (another 35%), were insured through their employer. 9% had no insurance coverage. Only the remaining 7% had non-group individually owned policies. While employer sponsored insurance, or ESI, as it is commonly known, is thus heavily dominant apart from government programs, it’s popularity belies the unappreciated harm it causes, to the extent, it can be argued, it is at the center of America’s healthcare mess.
Fortunately there is a path to ending the toxicity of ESI, yet maintaining the employer connection that has evolved as a favored device to lure and retain employees, but first let’s consider why ESI is so harmful. In doing so, it’s important to remember healthcare comprises not one but two distinct markets, one for insurance and another for medical services, both of which are corrupted by the presence of third party payers acting as agents for the buyer, and the first corruption sets up the next.
It’s also important to see employer provided insurance as an employment cost to the employer, and thereby part of an employee’s total compensation that could otherwise be paid in wages. When this is realized it can be seen that when an employer provides insurance what is really happening is the employee implicitly granting permission to the employer to spend a portion of their earnings on a financial product that may not be (and most often is not) in their best interest.
Now stop right there! Don’t people in the aggregate, allowing for those who often seem to do otherwise, always make choices in their best interest? So why aren’t they begging employers to end the provision health insurance if it’s so harmful and there’s a better alternative for them?
Often pointed as the culprit, is unequal tax treatment, where employees, on their own must use tax reduced dollars verses untaxed dollars if they have their employer provide health insurance for them. While this is a factor, in this author’s opinion there is more going on that would not restore rationality by simply equalizing the tax treatment, even as much as it would help.
Indeed employees think they are acting in their best interest when they really are acting in their perception of their best interest, which has been distorted by the separation from cost that happens with the employer provision. This has nothing to do with a rational assessment of tax implications or alternative provision of compensation by the employee but everything to do with an emotional “feeling” response to getting something as a benefit without knowledge of the true cost. Just ask and find out how many employees know how much their employer is spending on their behalf!
This has led to employees asking, even demanding, coverage of a wide array of medical services from the first dollar, never thinking they are willfully immersing themselves in paying for the incentivized overuse by others of what can normally be afforded otherwise. It’s not insurance, but a costly wasteful prepayment scheme. Yet they like it because they have been separated from what it costs, so remain ignorant of the implications. Again, ask a handful of employees the cost of medical treatment they’ve received, and if anything they may mention their copay! It’s allowed healthcare to become the only thing in our entire economy where almost every transaction involves, at least in part, the use of someone else’s money.
Often it’s pointed out that with car insurance we don’t expect things like oil changes, other routine maintenance, even larger mechanical repairs, to be included. Yet if car insurance had evolved to be employer provided chances are nearly certain we would!
Another seldom considered problem with ESI is individual suitability. Everyone’s financial situation is different, yet we’ve become accustomed to one size fits all cookie cutter approaches that few question when they think they’re getting something for nothing. More coverage is better when its cost is not a common consideration.
On the other hand, if employees were connected to the cost by buying individual insurance directly, they would quickly discover the fallacy, false comfort, and prohibitive expense associated with a cover everything approach. This would guide many to true insurance that only protects against unexpected high cost needs as they would become aware of the benefit of covering the small stuff directly out of pocket. Additionally they would free themselves to pursue job opportunities without the thought of losing or interrupting health insurance coverage.
At this point it’s not difficult to see how corruption of the market for health insurance by employer provision disconnecting the user from the cost then spills into the market for medical services. It’s not the user there either who is paying the bill, but a third party insurance company agent of the buyer who will never share the same self interest as the buyer directly. To the user, the cost is what they have to pay out of pocket, not the full charge, now inflated with considerable administrative costs added into the mix.
So how do we fix this mess? The answer is always to maximize direct payment in each of the two markets, insurance and medical services. Just as the corruption in the first leads to corruption in the second, direct payment in the first will lead to more direct payment in the second, as employees connected to the cost will quickly discover the problems inherent in the cover everything approach.
The good news is that a solution is at hand in the only bill introduced by the GOP in response to Obamacare that entirely makes sense. This is the HSA Expansion Act (HR247 & S28) introduced by Dave Brat in the House and Jeff Flake in the Senate. Unlike most legislation it does everything right.
Not only does it expand the contribution limits to HSAs, more importantly it allows HSA accounts separate of any insurance, thus allowing the purchase of insurance or medical services through an HSA as the single tax advantaged conduit. This opens the door to employers to maintain the incentive connection to employee health needs, while breaking the toxic provision of health insurance by shifting to a defined contribution model, where employers by direct or matching contributions to an employee’s HSA can become as common as to a 401k for their retirement needs. So long as states would follow by relaxing cumbersome regulations and mandates, employees could then decide what is right for their unique medical needs at costs truly subject to the discipline of the marketplace.
To this could be added an unique voluntary universal access approach that could replace both Medicare and Medicaid, maximizing direct payment, both actual and simulated, by a system of incentives, as previously discussed here and here, that, by trusting market forces over bureaucratic control, would have the power to strip out wasteful costs like nothing else I’m aware, as it supplants the growing Leftist desire for universal access by single government payer.
As many large employers with entrenched HR departments, are curiously wed to the provision of employee health insurance, one addition to the HSA Expansion Act that may get them to move toward defined contribution may be a provision to give employees the right to opt out of employer insurance with full transfer of the cost to their salary and/or HSA, as opposed to now, where declining employer offered insurance, say, to be instead on the policy of an employed spouse, results in little or no benefit to the declining employee.
Solutions are indeed at hand. We need only to identify and encourage elected officials to act on them, and the sooner the better!