If my car insurance isn’t linked to my employer, should my health insurance? A recent projection by S&P Capital IQ, a research firm in the financial industry, estimated that 90% of Americans will receive health insurance from government exchanges by 2020. If this estimate were to come to fruition, it would represent a monumental shift in the structure of the American health care system. For over half a century, employer-sponsored health insurance (ESI) has been the unquestioned norm. Instead of retreating from the unknown, however, we should embrace the delinking of health insurance from our jobs. Health insurance, after all, is a product like any other and deserves no special treatment.
If given the opportunity to construct a health care system from scratch, almost no one would adopt ESI as its central feature. How, then, did it become so ingrained?
Like many policies, it was an accident of history. During World War II, President Roosevelt signed Executive Order 9328, which froze prices on anything that affected cost-of-living, including wages, to control wartime inflation. The War Labor Board, however, subsequently ruled that the wage freeze did not apply to fringe benefits like health insurance. Thus, in order to recruit and retain employees, employers could no longer offer increased income but could use these so-called fringe benefits, like health insurance, to attract talent.
Finally, the Revenue Act of 1954 formally excluded employer contributions to health insurance from taxation, further increasing the interest of employers to offer tax-free health benefits rather than taxable wages to recruit employees, solidifying the link between employment and health insurance. While this may have been good policy in the mid-20th century, the test of time has yielded at least four negative, and unintended, consequences.
First, amid the constant controversy of loop holes and tax breaks for Wall Street, farmers, and oil companies, health insurance remains the single largest tax break in the U.S., costing the government nearly $300 billion each year. Because employees with greater rank and earnings tend to have more generous health insurance plans, they benefit from this tax break more than the less well-compensated. Health insurance, therefore, serves as a regressive, rather than progressive, tax break disproportionally and perversely benefiting the wealthy.
Second, because employers can offer this “tax-exempt” benefit instead of taxable wages to recruit and retain their employees, income stagnates.
Third, businesses generate leverage to negotiate with insurance companies by merit of having a group of employees. Without the benefit of this large negotiating group, unemployed individuals, self-employed individuals, and employed individuals without ESI have historically faced almost unattainable prices on the individual health insurance market. If you, therefore, wanted to leave your job, switch jobs, or start your own business, you had to risk not only your income but effectively forfeit health insurance for yourself and your family. With the advent of more affordable coverage in the new health exchanges, where insurers must compete for the business of a large group of individuals, people are no longer locked to their jobs solely to retain their coverage.
Fourth, in the traditional ESI model, employers negotiate and contract with insurers on employees’ behalf, effectively limiting consumer choice to just a few plans. Since employees have little say in the coverage they purchase, they are not able to pick a plan that best suits their individual needs and minimizes their cost.
If ESI does, indeed, evolve into a broadly used health insurance marketplace, several benefits would ensue. Wages would rise as employers would have to compensate for the reduced benefits to recruit and retain talent. This income, as opposed to health insurance, would be taxable, phasing out the largest tax break in the U.S. generating hundreds of billions of dollar annually. People would be free to switch jobs, work part-time, or try their hand at starting a business without fear of losing health insurance for themselves and their families. Consumer choice would increase as individuals would not be limited to their employers’ insurance contracts, and since individuals would be able to shop for health insurance like they can for car or life insurance (or a laptop or cellphone), competition among insurers would increase and costs would decrease. Perhaps a lizard promising 15% off in 15 minutes for health insurance will be born.
This alone will not fix our health care system, which is riddled with patchwork policies and remnants of political history now ingrained. But delinking health insurance from employment is a step in the right direction. Now, more than ever, we need dramatic changes to our health care system. Rather than fear changes to the status quo, let’s welcome them.
Simon Basseyn is a medical student.