The Paradox of Health Reform

Employer-based health insurance is dying. Why does Obama want to save it?

Click here for a guide to following the health reform story online.

President Obama has said more than once that if he were “starting a [health care] system from scratch” then he might very well prefer a government-funded “single-payer” health care system to the peculiar employment-based system of private insurance that evolved in the 1940s as a means for employers to evade wartime wage controls.

The only problem is that we’re not starting from scratch. We have historically a tradition of employer-based health care. And although there are a lot of people who are not satisfied with their health care, the truth is, is that the vast majority of people currently get health care from their employers and you’ve got this system that’s already in place. We don’t want a huge disruption as we go into health care reform where suddenly we’re trying to completely reinvent one-sixth of the economy.

From a political point of view, this argument is sensible and wise. Polls tend to show that while a significant majority of Americans favors a more aggressive role for government in controlling health care costs and extending coverage to the uninsured, a majority simultaneously pronounces itself satisfied with its own health insurance, which typically is provided by employers. A March poll conducted by CNN found an overwhelming majority (77 percent to 23 percent) dissatisfied with the health care costs borne by the country as a whole, but also found a narrow majority (52 percent to 48 percent) satisfied with the total cost of its own health care. It’s a baffling but not unusual discrepancy. As journalist David Whitman noted in his 1998 book The Optimism Gap, Americans tend to take an unrealistically sunny view of their own circumstances compared with those of other people. (A familiar illustration is the way the public consistently condemns Congress yet re-elects congressional incumbents year after year. Congress may be terrible, but my representative is the greatest!)

From an economic point of view, Obama’s argument that employer-based health insurance is entrenched in the United States is extremely shaky. In fact, employer-based health insurance is dying. A troublesome irony is that health care reform may spare this awkward and inegalitarian system the death it richly deserves.

Chances are that you, dear reader, have personally experienced employer-based health insurance’s decline. During the past decade, premiums have more than doubled; deductibles have risen by one-third. Because of rising costs, between 1996 and 2002 the percentage of private-sector employees offered health insurance by their employers declined from 81 percent to 77 percent. Even when offered health insurance, employees often couldn’t afford the payroll deductions; during that same period, the percentage enrolled in private-employer health plans declined from 70 percent to 62 percent. If the White House and Congress were to do nothing, it’s reasonable to conclude that employers would continue their gradual retreat from health insurance, which they are not required by law to provide.

In a May 22 post for the New York Times’ Economix blog (“Is Employer-Based Health Insurance Worth Saving?”), Princeton economist Uwe Reinhardt ticked off the reasons employer-based coverage doesn’t work very well:

  1. If you lose your job, you lose your health insurance.
  2. Having the company choose the insurer for its employees and then share the costs muddies the whole question of who pays and whether a given policy delivers good value. According to Reinhardt, over the long run, the company recovers its investment in the form of lower take-home pay for its employees, but employers tend not to recognize this and, instead, believe that they are competing on an unequal footing with counterparts in countries like Canada, Denmark, the United Kingdom, Italy, and Spain, where government picks up the entire health care tab.
  3. Because premiums are “experience rated” based on the health histories of a given company’s employees, one serious illness can drive costs up so high that health insurance becomes unaffordable, especially for smaller companies.

Not even Reinhardt, though, believes employer-based coverage should be allowed to perish, “brittle and expensive as that system may be.” Too many Americans “feel attached” to it.

Discussions currently under way in the House and Senate suggest the health reform bill may undermine employer-based health insurance in certain ways. Creating a “public option”—i.e., a new government program to compete with private insurers—would probably draw customers away from private insurers largely because the government program would be better positioned through sheer scale to negotiate lower payments to doctors and hospitals than private insurers could and, consequently, could charge lower premiums. As I’ve noted previously, the public option is the only reform likely to curb medical inflation quickly and dramatically, a vitally urgent task. (Unfortunately, the insurers’ lobby may well achieve its goal of severely restricting the public option’s ability to compete, thereby reducing or eliminating these potential savings.) Another idea under consideration would be to pay for expanded coverage in part by reducing the current tax break for employer-provided health insurance. This tax break is hard to justify on policy grounds because it’s regressive (the more generous your benefits, the bigger your tax break) and because it isn’t offered to people who purchase health insurance on their own as opposed to through their employers. But as candidate Obama (correctly) pointed out when John McCain proposed this reform, to whatever extent the tax break were reduced, employers could be expected either to provide less generous health insurance or to eliminate the number of employees who were eligible for such insurance.

At the same time that the White House and members of Congress are considering these measures that would have the effect (if not the intent) of undermining employer-based coverage, they are considering another measure that would have both the effect and the intent of shoring it up. This is “pay or play,” wherein employers would be required either to provide coverage to their employees or to pay into a fund that would allow these employees to purchase health insurance on their own within a special “exchange” offering tightly regulated private health insurance and possibly the public option.

Under “pay or play,” U.S. business, which currently is under no legal obligation to provide health care to its employees, would, one way or another, be required to do so. A de facto employer-based health care system would become a de jure employer-based health care system. Is that really wise? Politically, “pay or play” takes employers hostage so that voters can be reassured that a) their taxes won’t go up to pay for health reform and b) the employer-based insurance they prize beyond all reason won’t go the way of the dodo. But to whatever extent business has been sold on the idea that health reform will reduce its financial obligations, “pay or play” gives it the lie. Indeed, a June 8 New York Times story reported that Council of Economic Advisers Chair Christine Romer refused to make the global-competitiveness case for health reform in a recent report, despite being urged to do so by National Economic Council Director Larry Summers. Most probably, she agreed with Reinhardt that employers pass these costs onto their employees, but it’s easy to imagine she also realized that, to whatever extent businesses were absorbing these costs, “pay or play” would either continue imposing them or possibly even increase them.

If I were President Obama or Max Baucus, chairman of the Senate finance committee, which is taking the lead on writing the bill, I’d want the U.S. Chamber of Commerce as an ally on health reform. Allowing the bill to kill off what’s left of employer-based coverage could achieve that and would create sound policy in the bargain.

(For lovers of fine print only: To read the draft bill by the Senate Committee on Health, Education, Labor and Pensions, click here. For financing options under consideration by the Senate Finance Committee, click here. For coverage options under consideration by the Senate Finance Committee, click here. For an outline of what the House is considering, click here. For the president’s most recent detailed statement about what health reform should include, which is a lot less detailed than what’s available from Congress, click here. To read excerpts from a June 8 letter in which nine out of ten Senate Finance committee Republicans scream bloody murder about the prospect that health reform would include a public option, click here.)