Middle Class Welfare: The Pros and Cons of Employer Sponsored Health Insurance: Sources

What’s Wrong with Employer Sponsored Health Insurance Ed Dolan. 11 6 2018. Niskanen Center. The Real Reason the U.S. Has Employer-Sponsored Health Insurance Aaron E. Carroll. 9 5 2017. New York Times. Column: The health insurance tax exemption makes care more affordable,

The Real Reason the U.S. Has Employer-Sponsored Health Insurance

“The single largest tax expenditure in the United States is for employer-based health insurance. It’s even more than the mortgage interest deduction. In 2017, this exclusion cost the federal government about $260 billion in lost income and payroll taxes. This is significantly more than the cost of the Affordable Care Act each year.”

“Let’s take a hypothetical married pediatrician with a couple of children living in Indiana who makes $125,000 (which is below average). Let’s also assume his family insurance plan costs $15,000 (which is below average as well).

The tax break the family would get for insurance is worth over $6,200. That’s far more than a similar-earning family would get in terms of a subsidy on the exchanges. The tax break alone could fund about two people on Medicaid. Moreover, the more one makes, the more one saves at the expense of more spending by the government. The less one makes, the less of a benefit one receives.

The system also induces people to spend more money on health insurance than other things, most likely increasing overall health care spending. This includes less employer spending on wages, and as health insurance premiums have increased sharply in the last 15 years or so, wages have been rather flat. Many economists believe that employer-sponsored health insurance is hurting Americans’ paychecks.

There are other countries with private insurance systems, but none that rely so heavily on employer-sponsored insurance. There are almost no economists I can think of who wouldn’t favor decoupling insurance from employment.”

What’s Wrong with Employer Sponsored Health Insurance

“The high proportion of people who get their health insurance through their jobs is one of the most distinctive features of the U.S. health care system. According to the Census Bureau, 56 percent of the population had employer-sponsored health insurance (ESHI) as of 2017. ESHI accounts for 83 percent of all of those with private insurance of any kind. People whose health insurance is tied to their jobs far outnumber the 38 percent of the population served by government insurance of all kinds.”

“most people on ESHI appear to be satisfied with the coverage they get. A survey by America’s Health Insurance Plans (AHIP), an insurance industry group, found that 71 percent of respondents were satisfied with their ESHI plans, compared with just 19 percent who were not satisfied. An independent survey by Gallup came up with similar results, finding 69 percent of people on employer-sponsored plans to be satisfied. A study by the Employee Benefit Research Institute found that 50 percent of workers were extremely or very satisfied with their own ESHI plans, with another 39 percent somewhat satisfied.”

“Despite its popularity, though, serious health economists tell us that ESHI is “broke,” after all. No comprehensive reform can succeed unless it is phased out. This commentary examines three of ESHI’s biggest problems: job lock, which reduces labor mobility for ESHI beneficiaries; the fundamental inequity of the way the benefits of ESHI largely accrue to the highest -paid workers; and the increased fragmentation of health care finance inherent in a system administered by thousands of separate employers.”

“The term job lock refers to the tendency of employer-sponsored health insurance to discourage people from changing jobs; from starting a business of their own; or from reducing their hours to care for family members or move gradually toward retirement. Job lock undermines labor market mobility, makes it harder to match workers to the most suitable jobs, and cuts labor productivity.”

“Eichenwald suffers from a severe form of epilepsy for which medication alone costs $50,000 a year. His op-ed vividly details 40 years of struggles to secure and keep health insurance: small employers who refused to hire him because he would send the company premium through the roof; frightening gaps in coverage when he had to appeal to his parents to cover costly ER visits; a humiliating incident in which he had to beg for an entry-level job far below his qualifications just to maintain coverage.

Eichenwald’s experience is by no means exceptional. In the AHIP survey cited above, 46 percent of respondents listed health benefits as an important factor in deciding to work for their current employer. That included 9 percent who said health coverage was the decisive factor in taking the job. An even greater number, 56 percent, reported that health insurance had an impact on their decision to stay in their current job.

There is a large academic literature on the extent of job lock, well summarized in a 2015 literature survey by Dean Baker, published by the AARP Public Policy Institute. Baker notes that there is wide agreement that people with ESHI are less likely to change jobs, become self-employed, retire early, or reduce hours of work. At the same time, there are many other factors that influence labor mobility. Still, Baker concludes that even when those complicating factors are accounted for, the preponderance of evidence shows that job lock is a reality.”

“Suppose you are a head of household earning $60,000 a year, putting you in a 25 percent federal tax bracket. In that case, having your employer pay $14,000 of your insurance premium, rather than getting that much extra in cash and paying the premium yourself, saves you $3,500 in taxes. If you are a top executive in a 40 percent tax bracket, the tax deductibility of the insurance is worth $5,600.

However, according to the Tax Policy Center, some 44 percent of Americans will pay no income tax at all in 2018. Sixty percent of the nonpayers work. Even if they get ESHI, it gives them no tax benefit at all. They would be no worse off if health benefits were not deductible and if employers added the cost of their insurance to their cash pay instead.

A second factor adding to the inequity of ESHI is that low-wage workers, by and large, are not even offered the option of health benefits. The following chart, provided by the Social Security Administration, shows that only about a third of workers in the lowest fifth of the wage distribution are offered health benefits and that fewer than 20 percent accept those offers. In contrast, more than 80 percent of those in the top fifth of the wage distribution are offered health benefits and accept them.”

“Robert Kaestner and Darren Lubotsky, economists at the University of Illinois, Chicago, provide an estimate of the overall inequality of ESHI based on the combined effects of differences in tax rates and differences in offer and acceptance rates. As shown in the next chart, taken from their study, workers in the bottom fifth of the family income distribution get annual benefits of less than $500 from ESHI, while those in the top fifth get benefits averaging $4,500. What is more, the value of health benefits to well-paid workers grew substantially over the period shown in the chart, while the value for the lowest paid workers decreased slightly.”

“Fragmentation is a problem for small employers, who have little bargaining power in purchasing group policies from insurers, but also for larger employers. Many larger employers try to save on health benefit costs by self-insuring. According to Collective Health, a company that advises employers on their ESHI programs, 79 percent of companies with 200 or more employees self-insured as of 2017, up from 60 percent in 1999.

The problem is, companies that self-insure don’t always do a good job of it.”

“When it comes down to hard bargaining, health care providers, including big insurers, hospitals, and drug companies, are less fragmented than employers. Furthermore, health care is what they know best. For employers, whose main expertise lies in manufacturing, customer service, finance or other areas, health care is only a sideline. Given the structure of the system, providers will always come out ahead, driving up costs for workers and their families, who are the ultimate health care consumers.”

“people who have tried to trace its origins, like Indiana University’s Aaron Carroll, portray ESHI as an accident of history. Job-linked health benefits first became widespread during World War II when American firms faced both a labor shortage and a wage freeze. Desperate to attract employees, the story goes, they started giving out benefits like health insurance instead of cash raises. The IRS boosted the popularity of ESHI by declaring such benefits to be nontaxable. When President Truman’s attempts to establish a national health care system failed after the war, ESHI became a central element of a complex health care system whose many disparate parts have never fit together well.

We can do better than that.”