The Joys of Employer-Based Health Insurance
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Brad DeLong and Paul Krugman have some fun with Princeton expending resources and putting everyone through hassle to try to make sure that nobody’s smuggling a fake spouse onto their health insurance. This kind of thing is pure waste from a social point of view, but the privatization of health expenditures in the United States guarantees that we’ll see plenty of it.
This is part of why it’s too bad that the reform proposals in Congress don’t move more aggressively to bust-up America’s employer-based health insurance system. They’re timid on this score because they’re trying to meet the president’s pledge that nobody will have to give up the insurance they currently have. And he’s made that pledge because surveys indicate that the insured majority is generally happy with the insurance it has. So that’s life. But it is worth saying that insured Americans’ love affair with the insurance they have is a bit perverse. Having every large employer in the United States maintain a substantial side-business in managing a health insurance plan is a senseless waste of society’s resources.
If instead people had higher salaries, higher taxes, and government provided insurance you could give everyone equally comprehensive insurance and put some extra money in their pockets. Or if instead people had higher salaries, the same taxes, and bought insurance on their own in regulated “exchanges” you’d probably wind up with everyone having slightly worse insurance and a lot of extra money in their pockets.
19 Responses to “The Joys of Employer-Based Health Insurance”
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July 15th, 2009 at 12:21 pm
Of course, tying health care to employers was Harry Truman’s bright notion, who, much like Matthew, likely discounted the importance of contemplating unintended effects.
July 15th, 2009 at 12:30 pm
I speak from ignorance, so I hope someone here can help me: Has there been any evidence that in a switch from employer-based to public health insurance that people would actually end up with higher salaries? B/c I’d be shocked if my employer didn’t just take the money and run, unless absolutely compelled to pay me more. And I work for the state.
July 15th, 2009 at 12:36 pm
There is still a way to have universal government-run health care. I was thinking of one of Ezra’s posts, actually. What they have in France is a mix of Britain’s government plan with private insurers providing supplemental care. We could actually gradually increase support for what Health and Human Services considers public health risks. Now you can get immunizations and such. We could gradually increase general public health funding based on their Quality Life Year (QALY). Start with the best return on investments to improve public health. Then increase the dollar value of QALY each year. Ezra said Britain sets theirs at about $33,000 cost per quality life year. You could start very low, at $1000 and work it up into the kind of two tiered system the French have. Voila.
July 15th, 2009 at 12:44 pm
Having every large employer in the United States maintain a substantial side-business in managing a health insurance plan is a senseless waste of society’s resources.
Many large employers outsource health insurance administration, as that’s often cheaper than handling it in-house.
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We could gradually increase general public health funding based on their Quality Life Year (QALY). Start with the best return on investments to improve public health. Then increase the dollar value of QALY each year.
QALY may not be an acceptable concept in the United States. Unlike the Europeans and Canadians, we do not accept any restrictions on medical spending even when there is little or nothing to be gained, e.g. hugely expensive heroic interventions on senile 90-year-olds with multiple organ failure.
July 15th, 2009 at 12:47 pm
One of the reasons the Islamic world is behind the rest of the world is its resistance to letting women into the work place. It’s a structural clamp on growth. Here in the US, we have a clamp due to a hegemon’s military paranoia AND we have a clamp due to our insane health care system. Since other countries get by with spending 60% (max) of what we do on health care they can afford to spend money on other things. And they do. It would be significant difference even if we weren’t slaves to the Military Industrial Complex. Americans need to get out and see the rest of the world and see how simply NICE it is elsewhere. I was shocked to see Rostock and Warnemunde in (the former East) Germany. I’d assumed that they would display grim reminders of the corruption of their communist past. But, no. They’ve moved on. Brightened up the place. 20 years is a long time. The USA has been stunted by our health care system for years, and it’ll only get worse unless we change.
July 15th, 2009 at 12:52 pm
… surveys indicate that the insured majority is generally happy with the insurance it has.
… Until they actually need it.
July 15th, 2009 at 12:52 pm
ssmmm,
That’s a good point, I don’t know if the House plan covers this issue.
One part of the Wyden-Bennett health reform plan I liked is that when an employer dropped its health coverage, they’d have to take their current health insurance premiums and distribute in on a per-capita basis to it employees. I believe the payout would continue for a couple of years and then the employer could itself keep the premium cost savings. Perhaps it’d be better to split the savings equally between employer and employee and continue the split indefinitely as part of a profit sharing plan.
IIRC the average employer premium cost per employee is $4000 a year (and that might be low). If an employee got 100% of that amount, its like a $2 an hour raise. Not bad as stimulus packages go.
Employees without health coverage wouldn’t get the payout of course, but since they’d get affordable health insurance in the bargain, I doubt they’d whine too much.
July 15th, 2009 at 12:56 pm
Yes. Everybody would be a little better off – except for
a bunch of people working in HR departments and insurance
companies, who would lose their jobs. So it’s one of those
tricky issues where their ought to be a large majority who
are slightly in favor of the change, but a small minority
who are desperate to keep the status quo.
The political institutions of the USA aren’t good at dealing
wih this kind of issue.
July 15th, 2009 at 1:06 pm
Everybody would be a little better off – except for
a bunch of people working in HR departments and insurance
companies, who would lose their jobs.
Except that they have lots of relevant experience to apply to become administrators at the new private plan or health insurance exchanges. It’s true that if administrative costs go down, there will be a sort of musical chairs where there are fewer new positions than old ones, and some people will have to change industries or retire, but most of them will do fine jumping ship for the new institutions that replace the old ones.
July 15th, 2009 at 1:08 pm
Will Allen,
You’re mistake about Truman. It was a 1943 IRS regulation that made health insurance premiums tax-deductible. At the time Truman was still a senator, FDR was president.
Truman’s idea was a national single-payer system. Let’s go to the Time Magazine archive…
The essentials of the Truman health program:
All of the 85 million Americans now under Social Security (and another 35 million more if Social Security is expanded) would be entitled to complete medical, surgical, dental and hospital care. Even eyeglasses, false teeth, glass eyes, artificial arms & legs would be provided, as under Britain’s new socialized medicine.
Most of the money would come from a 3% federal payroll tax, 1½% paid by employee, 1½% by employer. The tax would apply on the first $4,800 of individual income. From the U.S. Treasury, the Government would kick in ½% of the fund the first year, 1% thereafter.
http://www.time.com/time/magazine/article/0,9171,800134,00.html
July 15th, 2009 at 1:35 pm
Paula,
Oregon used QALY rankings with their Medicaid system but (from what I’ve read), the cost savings slowly dissipated as different disease lobbies pressured Oregon to pay for their pet malady, regardless of QALY rankings. You can’t discount the reality that adults dying of cancer vote, but children who miss their vaccinations do not.
Sorry for being such a thread hog, I’ll go back to work.
)
July 15th, 2009 at 2:17 pm
You are correct, of course. Roosevelt, not Truman.
July 15th, 2009 at 2:50 pm
So, would the government insurance plan not take any steps to reduce or eliminate fraud? Or would it just be cheaper to take these steps? Have they determined that the total amount of fraud is less than the money spent trying to stop it? Or would people be so thankful for government insurance that they would never commit any unscrupulous acts? I’m not sure I follow why diligence on the part of insurers would go away just because the insurer is the government.
July 15th, 2009 at 3:23 pm
There’s more than one way to bust-up the employer-based health insurance system.
Regarding FDR/Truman. It’s true that Truman backed what essentially was single-payer. So did FDR in the 1938 Hospital Care Bill, and his 1944 Second Bill of Rights speech, and the Wagner-Murray-Dingell bill that came alongside it.
The employer-based system was largely a bureaucratic accidental invention, a combination of the National War Labor Board’s decision to make “fringe benefits” a required topic of collective bargaining (in part to keep labor content at a time when wages were frozen and the CIO had taken a no-strike pledge), and the IRS’s decision to make it tax-free. I don’t think you can really apply presidential initiative as the source of that.
July 15th, 2009 at 4:56 pm
The depth of that survey sounds incredibly shallow. It’s probably more about undermining a talking point aimed at the majority — “They are going to take away the insurance you have!” — that opponents were bound to launch.
If the government takes control of covering catastrophic claims for everyone, including those with insurance through an employer, the stakes for the remaining “gap insurance” are reduced enormously. If an employer still wants to buy it for the employees as a perk, as is likely for the blue chips, great, but if not, that’s fine, too, because the employee has alternatives and is, at minimum, covered against the worst case. The critical point is not to disassociate insurance from employment, but to end the need for a job in order to be insured at affordable cost for everyone.
I still believe this debate would be enormously enhanced if we distinguish between genuine insurance against unexpected loss, i.e., catastrophic insurance or the equivalent of a so-called high deductible policy, and insurance against lesser amounts that also can be considered to be more in the nature of enforced savings for irregular but relatively expectable and non-disastrous losses. It is the former that most needs to be socialized, and is by far the most supportable politically across a wide spectrum of beliefs.
July 15th, 2009 at 5:07 pm
I apologize if I’ve posted this before.
Let me ask everyone a question: Do you consider price and discount when buying Tylenol and Pepcid? I answer in the affirmative.
Here’s another question: Do you consider price when considering brain surgery? I answer in the negative.
Therefore, I suggest splitting health care costs into two categories:
1) Medical goods that a consumer could price and shop accordingly on.
2) Medical goods that a consumer cannot price and shop accordingly on.
Once you do this, you can split up medical costs into:
1) Costs subject to a deductible.
2) Catastrophic Costs.
And, further, you can say the following:
For 1) You don’t want third party payers, since you want the consumers to shop for the best price.
For 2) You can have a third party payer. In fact, you can have one: the Federal Government.
Now, here’s Milton Friedman’s plan:
“A more radical reform would, first, end both Medicare and Medicaid, at least for new entrants, and replace them by providing every family in the United States with catastrophic insurance (i.e., a major medical policy with a high deductible). Second, it would end tax exemption of employer-provided medical care. And, third, it would remove the restrictive regulations that are now imposed on medical insurance—hard to justify with universal catastrophic insurance.
This reform would solve the problem of the currently medically uninsured, eliminate most of the bureaucratic structure, free medical practitioners from an increasingly heavy burden of paperwork and regulation, and lead many employers and employees to convert employer-provided medical care into a higher cash wage. The taxpayer would save money because total government costs would plummet. The family would be relieved of one of its major concerns—the possibility of being impoverished by a major medical catastrophe—and most could readily finance the remaining medical costs. Families would once again have an incentive to monitor the providers of medical care and to establish the kind of personal relations with them that were once customary. The demonstrated efficiency of private enterprise would have a chance to improve the quality and lower the cost of medical care. The first question asked of a patient entering a hospital might once again become “What’s wrong?” not “What’s your insurance?”
I would add a Democratic Party addition to this plan: You could relate the deductible to income.
That’s my plan. Everyone covered.
I would add the following: I’ve no idea what the correct amount of money that we should spend on health care should be. That’s why I would like some portion of our medical bills to be subject to our own choice.
July 15th, 2009 at 6:48 pm
Re: course, tying health care to employers was Harry Truman’s bright notion
It came about during WWII and was NOT Truman’s idea. Truman (please look this up) ried to ebnact true National Healthcare. Nowadays the system survives, and would survive even without the tax advantages, mainly because the only current alternative (individual health insurance) is absolutely horrible, at least for most people.
By the way, what is a “fake spouse”? Marriage is a mater of public, legal record. If people are claiming spouses to whom they are not in fact married that should be rather easy to discover. I can see an issue with domestic partners since there’s no legal bond, but marriages create paperwiork legitimzing them.
Re: Until they actually need it.
Most people have little trouble with their insurance because most people are healthy and only use their insurance for minor things– doctor’s visits and prsecriptions, maybe an Xray for a srained ankle, or an age or circumstance dictated diagnostic test. that stuff is small potatoes and insurers rarely make a fuss over those bills. So most people are indeed content with their employer’s coverage. Thoise given the fact that the uality of that coverage is degrading almost as fast as Greenland is melting, and that copays keep going up and up, disastisfaction is indeed rising.
Re: So, would the government insurance plan not take any steps to reduce or eliminate fraud?
Detecting fraud isn’t that difficult. There’s software that can detect fraudulent patterns in claims (few fraud artists stop with just one or two milkings of the system), and I’ve even written a software module for a former employer that would flag the more common means of bill-padding that providers use.
Re: universal catastrophic isnurance.
Anyone advocating this should consider that the deductible should be converted into a per-lifetime deductible in the event of major, long-term illnesses and injuries, so that people who develope diabetes, MS, emphysema, many cancers, etc or who suffer lifetime injuries are not stuck paying 10K a year, every year for the rest of their lives. That is a short trip to bankruptcy too.
July 15th, 2009 at 11:58 pm
Don the libertarian Democrat,
Its a good idea, but Martin Feldstein beat you to the punch.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=226533
July 16th, 2009 at 7:20 am
What people really like about employer health care is the non-deniability – if you give it to one employee, you have to offer it to all – and the lower costs because of a mixed member pool. Imagine the situation if you took away employer sponsored insurance but did not have a public alternative, only individual plans with some makeshift co-op system. People who would be expensive or uninsurable but who had employer coverage would be pretty much screwed.
The tax exemption is tied to the applying the insurance to all employees. If you took away the exemption, and the insurance for all employees, the system would just be subsidized individual plans, which is not the direction we want to go.