Tuesday, August 25, 2009

Health Care and Your Employer: Severing the Link

Consider some of the problems with health care in the United States:

If you do not get health insurance from your employer and you are not eligible for Medicare or Medicaid, a health care policy is expensive and you have limited choices. As a result, you have, at best, a large bill to pay. At worst, you go without insurance, and risk financial catastrophe if you contract a serious illness.

If you do get health insurance from your employer, you are significantly insulated from its costs (employers that offer insurance pay, on average, 84% of the tab for individuals). As a result, there is more demand for medical services, raising the national doctor bill to over $2.2 trillion a year and rising. (I know there is skepticism that insulation really affects health care costs – I’ll address that in a future entry).

If you lose your job, you may lose your policy. As a result you are at risk of being turned down for coverage for pre-existing conditions under a new policy.

There is a common element to these problems. They all exist because a majority of Americans (about 60%, according to the Census Bureau) get their health insurance from their employers. The main reason they do so, rather than buying it themselves, is a quirk in the tax laws. If your employer buys your health insurance for you it is fully tax deductible. If you buy it yourself, it is not. So it is cheaper for you to accept a lower salary and let your employer use the difference to buy you health insurance.

I’ve written in recent weeks that Obamacare will limit health care choices and raise health care costs. I’ve also written about the House Republican Health Care Solutions Group’s alternative. By extending the health insurance tax deduction to individuals, the GOP proposal levels the playing field between individuals and employers. It thereby addresses the root cause of the problems of cost, choice, and job loss. Due to the lack of public support, the President will need to retool his health care proposal when Congress comes back from August recess; he would do well to consider some of the ideas coming from across the aisle.

(P.S. Thanks, Suzie, for helpful discussions on this.)


Blogger John said...

This may well be a good idea (removing the tax asymmetry), but it seems to me there is another assymetry whose implications ought to be dealt with: insurance through employers often have "open enrollments" -- that is, the policy is negotiated for all employees of the company at once, and also often give the insurer very little ability to refuse coverage.

This has two effects that I think cut in different directions: 1) it prevents insurers from individually cherry-picking the healthier from the unhealthy, but 2) it does let insurers set premiums by employees as a group.

So, the insurer often can't charge more to cover employee Bob because he is predisposed to some condition that would be costly to deal with later (but a condition he doesn't have yet), but at the same time it can set different premiums between, say, lawyers and workers in a pesticide factory.

Either of these might be good or bad depending on your attitude about the purpose of insurance and it's value as social welfare. But whatever way you look at it, these differences will make the market for insurance different depending on whether individuals or employees are buying, even if you fix the tax deduction issue.

As a side (but related) note: the thing that I find missing in a lot of the healthcare debate is this question of how we really want the risk-pooling to work: do we want, in essence, a single risk-pool with everyone in it (which as I see it is something that single-payer would bring us closer to), or if not, how much ability to we want to give the insurance companies to tailor products for different risk pools? And based on what (genetic predisposition vs. behavior for example)? And if we permit tailoring, how to we regulate, incentivize, or subsidize them to prevent them from doing more of it (i.e., cherry-picking) than we are collectively happy with?

August 26, 2009 11:44 AM  
Anonymous Suzie said...

Open enrollment is terrific if it is a family plan as opposed to just for the employee. Also, if Bob is 55 and gets laid off and has diabetes, that has been under control because of his terrific health insurance, will he be able to afford COBRA, or be eligible for a less expensive plan that he can afford? In Massachusetts we cannot be denied health insurance for a pre-existing condition, so we are insulted from that stress, but we pay for it in high premiums that go up every year. Also, doesn't insurance work best when low risk and high risk are all pooled together, for someday those low risk 20 somethings will become the higher risk 50 somethings.

August 26, 2009 4:04 PM  
Blogger Li Kim Grebnesi said...

John, Suzie: Thanks for the comments. The issue of risk pooling is not a simple one...

August 26, 2009 8:49 PM  

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