April 28, 2019


Bringing Private Health Insurance Into the 21st Century: A plan for blending the best aspects of American health care with market-based models abroad. (Avik Roy, Apr 21, 2019, FreOPP)

Employer-sponsored insurance
Overall grade: C-minus
2019 enrollment: 151 million (excluding members of the Federal Employees Health Benefits Program)

While employer-based health insurance coverage is commonly thought of as America's "market based" health insurance system, it departs considerably from market principles. Employers rely on the largest and fastest-growing subsidy in the tax code--the exclusion from taxation of the value of employer-sponsored insurance (ESI)--to offer coverage to half of all Americans. The Joint Committee on Taxation estimates that fiscal value of this tax break in 2019--in terms of lost revenue to the federal government, and/or lower taxes elsewhere--is 1.4 percent of GDP, or roughly $300 billion. The value of the exclusion from state and local taxation represents an additional $38 billion, for a total of $338 billion. (Fiscal sustainability: C).

Because ESI premiums are taken out of a worker's paycheck before he receives it, employees rarely understand how much of their compensation is taken up by the cost of health care. They demand access to costly services because they lack the tools to understand how costly services affect their health insurance premiums. (Consumer-driven incentives: D)

This lack of price sensitivity, in turn, has led the cost of employer-based coverage to explode. Indeed, American ESI is the costliest form of health insurance in the world. (Underlying cost: F)

Furthermore, workers in the ESI system rarely get to choose their health insurer; instead, that insurer is chosen on their behalf by a human resources executive at their employer. However, an increasing number of employers are deploying high deductibles and other cost-sharing tools to keep costs down; average deductibles have tripled in the last decade. As a result, more workers are gaining access to tax-advantaged Health Savings Accounts and Health Reimbursement Accounts, which provide improved choice for routine health care expenses. (Freedom of choice: D)

In general, however, employers know that their employees are not price sensitive, and see generous health benefits as a retention tool. As a result, they have been reluctant to limit access to costly providers or health care services, out of fear that workers will rebel and decamp to a rival employer. (Access to doctors: A; Access to innovation: A)

Posted by at April 28, 2019 7:23 AM