The Folly of Employer-Based Health Insurance

Published August 17, 1994

While debating whether to force employers to provide health insurance to their employees, Congress should take the opportunity to re-evaluate the notion of employer-based health insurance. The link between health insurance and employment is inherently weak and produces some painful consequences: higher health care costs, narrower choices for individuals, and more uninsured Americans.

It is curious indeed that employers provide health insurance. Why don’t they provide property, fire, or auto insurance? And why employers at all? Americans stay with their churches twice as long as with their employers–eight years versus four. Why not get insurance from churches? An historical accident prompted by public policy, that’s why.

During World War II, the government froze wages and prices. To attract and keep employees, firms had to offer something that evaded the wage controls. What they offered was pensions and health insurance. Having opted to provide their employees with these “fringe benefits,” employers sought a way to increase the benefit to themselves. Employers lobbied for, and received, a tax deduction that individuals themselves can’t get. Employer-provided insurance policies are paid with pre-tax dollars; individuals who purchase their own policies must pay with after-tax dollars. The price difference is huge: A $4,000 health insurance policy costs an employer roughly $3,716 in pre-tax dollars; the same policy costs a n individual roughly $8,214 in after-tax dollars. Not surprisingly, 75 percent of workers believe their employers should provide health insurance.

But the health insurance benefit isn’t as beneficial as it appears. First, employees must accept the group plan their employer selected, rather than choose coverage tailor-made for their needs. Employer-provided health insurance restricts choice in health care.

Second, the big tax deduction spurs employers to buy low-deductible policies covering too much elective and routine care. With deductibles as low as $200, many of a firm’s employees over-utilize the health care system. By increasing the demand for health care, employer-provided insurance also increases the cost of health care. One study estimates that some 10 million people are priced out of the health care market because of the price inflation spurred by employer-provided health insurance.

Third, when insurance is employer-provided, losing your job means losing your health insurance. To make coverage “portable,” Congress passed COBRA (Title X of the Consolidated Omnibus Budget Reconciliation Act, implemented in 1985 and 1986). But a laid-off employee can continue coverage under the company’s plan only by agreeing to pay the expensive premiums. The law prohibits the former employee from choo sing a higher deductible to get a lower premium. And the employee can’t take the employer’s tax deduction. So, unable to afford the plan, the employee goes uninsured. We’ve tied insurance to employment . . . and then we wonder why the unemployed are uninsured!

The solution is clear: Sever the employment-insurance link. This reform is easily accomplished. Congress need only “level the playing field,” either by allowing individuals full tax deductions or by slashing employers’ deductions. If either reform were adopted, most people would then prefer individual insurance coverage. Many would choose higher deductibles — and get lower premiums as a result. Losing or changing jobs wouldn’t affect coverage.

As President Clinton might say, “it’s time for a change.” Let’s hope Congress and the Administration soon change their approach to health care reform: away from employer- provided health insurance, and toward individual insurance.

Eric Banfield is a policy analyst for The Heartland Institute and owner of Banfield Analytical Services in Westmont, Illinois.