Portable, Personal Health Insurance Solves Many Consumer Problems

Published June 1, 2006

One of the peculiarities of the U.S. health care system is that most of us have insurance plans we didn’t choose: Our employers selected them. Even if we like our health plan, we could easily lose coverage when we lose or change jobs, or because of a decision by our employer. These problems affect all Americans, and they most powerfully impact older workers, who are more likely to have health problems.

In his State of the Union address in January, President George W. Bush proposed making health insurance individually owned, personal, and portable, enabling it to travel with employees from job to job. It is an idea whose time has come.

Creating Problems

One problem our current system creates is lack of continuity of coverage. Virtually all employer health insurance contracts last only 12 months. At the end of the year, the employer, to reduce costs, may switch health plans or cease providing coverage altogether. The only people with private health insurance guaranteed to last longer than one year are those who purchase insurance on their own.

Another problem is lack of continuity of care. Employer-sponsored health care evolved when most health insurance was fee-for-service–meaning employees could see any doctor or enter any hospital, and the insurance paid all or most of the bills. As a result, a job change usually did not cause undue disruption, provided both employers offered health insurance plans.

Things changed after managed care debuted. Today, employees who switch jobs must not only switch health plans but also doctors, since plans tend to have their own networks. Additionally, different plans have different benefit packages, meaning services such as mental health may be covered under one employer’s plan but not another’s.

Burdening Employees

For healthy people, these disruptions are minor inconveniences. But if an employee (or a member of his family) has a health problem, there may be an interruption in care. One study of chronically ill workers–a working paper titled “Chronic Illness and Health Insurance-Related Job Lock,” published by the Center for Policy Research at Syracuse University in August 2000–found those who rely on employers for health coverage are 40 percent less likely to change jobs compared to similar workers who obtain health coverage elsewhere.

For a growing minority of workers with high health care costs, health insurance is the main attraction, rather than the job or the overall pay.

To protect themselves from attracting workers whose primary motivation is getting their medical bills paid, employers are increasingly altering their health plans to attract the healthy and avoid the sick. Having small co-payments for routine office visits and higher deductibles for hospitalization is one technique. Having long waiting periods before employees become eligible for the company’s health plan is another.

Protecting Society

These are rational responses to a labor market that increasingly resembles a game of musical chairs. But what is good for employers is not necessarily good for society.

The lack of individually owned, portable insurance is particularly burdensome for many women who are married to older men. When husbands retire and enroll in Medicare, wives can be left without coverage, because Medicare won’t allow enrollees to sign up underage spouses.

If the couple has to purchase her insurance until she reaches 65 and qualifies for Medicare, they have to do so with after-tax dollars. She will be at a time in her life when she’s charged higher premiums, since health risks tend to rise with age. And she’ll pay even more (or possibly be denied insurance altogether) if she already has an expensive health problem such as breast cancer.

The main source of these problems is the tax penalty on portable insurance. Tax law is the main reason companies provide workers with health insurance rather than paying higher wages with which employees could buy their own insurance.

People receiving employer-based health insurance enjoy an enormous tax advantage. Employer-paid premiums avoid federal, state, and local income taxes as well as the FICA payroll tax. People who buy their own insurance get no tax break unless their medical costs exceed 7.5 percent of their adjusted gross income. Even then, they get only a simple deduction and must itemize on their tax return. As a result, genuinely portable insurance is penalized.

Discouraging Portability

For a typical middle-income family, government effectively pays half the cost of employer-provided health insurance.

Suppose a family’s insurance costs $6,000. If the employer buys it, it is paid for with pretax dollars. The employer sets aside $6,000 as pretax payment for that employee’s insurance rather than paying it as taxable wages. If the family directly purchased the insurance, the employee would have to earn $12,000 in order to have enough left after taxes to buy it. In terms of the amount of pretax income needed, insurance purchased directly with after-tax dollars costs the family twice as much.

Federal law causes another problem. Lawyers interpret the Health Insurance Portability and Accountability Act of 1996 (HIPAA) as saying the only employee health insurance employers can purchase with pretax dollars is group insurance–meaning the only choice is between subsidized (nonportable) group insurance or unsubsidized portable individual insurance. Ironically, the law that was designed to encourage portability effectively outlawed it

Developing Transition Plans

Just because employers pay all or most of the premiums does not mean health insurance has to be employer-specific. There is no economic reason that employees can’t enroll in health plans that meet their needs and retain them as they travel from job to job. Employers should be able to buy personal and portable insurance for their employees with pre-tax dollars, just as they are able to buy group insurance today.

Even though employers initially would pay the premiums (as they do today), the employees would own the insurance and keep it as they move through the labor market. Thus, employees would get portability (a characteristic of individual insurance), but they would get it for premiums that are closer to the cost of group insurance.

Five years ago, the National Center for Policy Analysis and Blue Cross/Blue Shield of Texas proposed a detailed plan to transition from group insurance to personal and portable insurance. The plan is compatible with Bush’s nationwide proposal.

Giving Advantages

Portable health insurance promises a continuing relationship with an insurer and, therefore, a continuing relationship with doctors and health facilities. It also promises that if people like their health plans, they will be able to stay in them without worrying about an employer’s decision or a job change.

For employers, portable health insurance means small groups are no longer treated as self-contained pools and rated each year based on changes in their employees’ health status. Instead, employees become members of very large pools in which no one can be singled out because of a sudden, large medical expense, and premium increases are the same for all.

Because the employer’s role is largely financial, in a real sense employers will get out of the “business” of health insurance.

John C. Goodman ([email protected]) is president of the National Center for Policy Analysis.

For more information …

The National Center for Policy Analysis and Blue Cross/Blue Shield of Texas plan for transitioning to personal and portable insurance is available online at http://cdhc.ncpa.org/news/making-health-insurance-portable.