Butler S. Bye, Bye Employer-Sponsored Health Insurance? JAMA Forum Archive. Published online August 6, 2014. doi:10.1001/jamahealthforum.2014.0031
The hullabaloo following the US Supreme Court’s ruling in the Hobby Lobby case has prompted a timely debate about the role of employers in providing health insurance. Some critics of the decision demand that employers be stopped from “interfering” with a worker’s insurance for certain services, such as contraception, even if the employer has profound religious objections to sponsoring such coverage. That in turn led to efforts to pass legislation that would block privately owned firms from using religious beliefs as a reason not to provide certain features of health insurance.
Stuart Butler, PhD
Putting aside the legal technicalities, critics of the Hobby Lobby decision are right to be concerned about employers essentially controlling the health coverage of their workers. But most critics have the wrong solution.
The answer is not to start interfering with religious liberty, or engage in an arcane legal dispute about whether a private corporation is a “person,” or to strengthen mandates on employer coverage. The correct strategy is to push forward with tax reforms and other steps that would lead to the disappearance of most employer-sponsored insurance. That’s actually something both advocates of single-payer systems and conservatives should agree on.
Health economists of all stripes, as well as employers and benefits managers, recognize the notion that employers “pay for” health benefits is a myth. In truth, health insurance is just a part of an employee’s total compensation, like cash income or a payroll deduction for a 401(k) retirement plan.
Employers are not charities, and total compensation is determined by local labor market conditions. But under Internal Revenue Service (IRS) tax rules, if the employee lets his or her boss make the crucial decisions over the part of their pay involving health insurance, it becomes free of tax.
While tax-free employer-sponsored health insurance is familiar and popular, it has many problems, besides those at the center of the Hobby Lobby case. For one thing, the tax benefit is very regressive, with highly paid employees in the top brackets gaining most from the tax breaks and lower-paid workers receiving the least. That’s exactly the opposite of good public policy aimed at helping people afford insurance.
In addition, the illusion that the employer pays has long been criticized as encouraging overuse of care and fanning cost escalation. That’s a major reason why many employers have been decreasing the share of compensation paid in the form of “employer-paid” insurance, so that employees have more skin in the game in controlling costs. Add to those concerns the worry that employment-based insurance often results in “job-lock”— where a worker is reluctant to move to a better job or become self-employed”— because moving could result in a change or loss of coverage.
These problems have spurred many proposed reforms aimed at modifying the employer’s role in health insurance. The most recent is of course the Affordable Care Act (ACA). By establishing health exchanges—a mechanism widely advocated for many years—the ACA provides for some Americans an alternative platform to employment-based coverage for organizing health insurance. And by combining a cap on the tax-free status of employer-sponsored insurance with tax credits and subsidies for exchange plans, the ACA takes some steps down the road of reducing the tax bias associated with employer-controlled coverage.
But the design of the ACA falls short of what is needed. In an unwise effort to prop up the employment-based system and to contain the program’s budget cost, the ACA’s sponsors flinched from equalizing the tax breaks and subsidies for exchange plans and employer-sponsored health insurance. Yet that tax and subsidy disparity actually threatens to undermine employer-sponsored coverage in firms with many lower-paid workers. That’s because the government subsidies available for many such families enrolling in exchange plans are much larger than the tax benefits of employer-sponsored insurance , encouraging employers and workers to drop employer-sponsored insurance in favor of extra cash earnings. Meanwhile the delay of the ACA’s mandate on employers, triggered by concerns of hiring cutbacks, underscores the fact that trying to force employers to provide government-designed coverage is likely to fail.
Some have argued that employer-sponsored insurance will continue to erode, in part because of the ACA. Former Obama health advisor Ezekiel Emanuel, MD, PhD, an architect of the ACA, predicts that by 2025, fewer than 20% of private-sector workers will have traditional employer-sponsored insurance. He could be right. Like conservative health economists, he has long criticized tax-exempt health insurance.
But rather than allow a transition to occur in a haphazard way, it would be wiser to have an open and thorough debate about the importance of moving away from employer-based insurance. Such a discussion hopefully would avoid a clumsy and likely damaging “fix” for the Hobby Lobby decision.
Back in 2007, I proposed a strategy for an orderly transition, called the Health Exchange Plan. That plan envisioned state-chartered exchanges. There would also be a cap on the tax-free status of employer-sponsored coverage, in conjunction with a refundable tax credit for lower-income families. The cap would be indexed to grow more slowly than the expected increase in employer-sponsored insurance, thereby gradually reducing the tax bias in favor of such coverage.
Importantly, the Health Exchange Plan still envisioned a continuing role for employers but not the role of picking coverage. The place of employment would continue to be where the transactions took place, with employers arranging payroll deductions for plans and helping employees sign up for plans. No doubt many larger firms would continue to offer wellness plans and take other steps to promote a healthy workforce. Some might continue to offer coverage, and would be allowed to do so, but most would transfer the control of coverage to their employees.
The result of the plan would be that the vast majority of employers would become facilitators of exchange-based coverage and no longer the sponsors or controllers of coverage. It seems to me that’s a result both Hobby Lobby and its critics would applaud.
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