Employer Health Insurance: A Bargain Compared to Government-Sponsored Coverage

After years of slowing growth, employer health costs are forecast to climb at a faster pace next year, according to PricewaterhouseCoopers.

Even with that projected growth, employers are spending much less per person than is the government — about 60 percent less, concludes a new study from the American Health Policy Institute.

Encouraging the expansion of employer-sponsored insurance would therefore seem to be more cost-effective than handing out government coverage to more people. Naturally, Obamacare is choosing to follow the latter path — by inflating Medicaid’s rolls and mandating costly coverage benefits that compel companies to dump their employees in the law’s exchanges, where they can get taxpayer-subsidized insurance.

So much for President Obama’s promise that health reform would “build on what works” and “fix what’s broken.”

The AHPI study found that employers spent $3,430 on health care per person in 2012. By contrast, government programs spent $9,130.

The study makes clear that some of the spending difference is due to the fact that Medicare, Medicaid, and the Veterans Health Administration tend to serve older, sicker, or special-needs populations.

But that’s not the entire story.

Employer plans’ costs aren’t just lower — they’ve also been rising more slowly. Between 2003 and 2012, employer costs climbed 13.6 percent, after adjusting for inflation, compared with 14 percent for government programs.

That difference might seem insignificant. But given that employers spend $579 billion and that government spends more than $1.1 trillion, it translates to billions of dollars.

Employers have had more success controlling costs in large part because they’ve adopted consumerist and market-friendly approaches to health insurance.

Consider Health Savings Accounts, which combine low-premium, high-deductible insurance policies with tax-free, interest-bearing savings accounts for out-of-pocket expenses. Individual employees can save up to $3,300 — or $6,550 for a family — per year.

In many cases, employers help their employees work toward that savings goal. Any money left in an HSA rolls over from year to year, giving workers both more control over their health care and a strong incentive to be prudent shoppers.

One large Midwestern employer saw health spending drop 25 percent in the first year after adopting HSAs, with additional savings in each of the three subsequent years, according to a five-year study by the Employee Benefit Research Institute.

Not surprisingly, the popularity of HSAs has exploded, going from zero to 20 percent market share in just eight years. They’re now the second-most popular type of employer health plan, according to the Kaiser Family Foundation.

HSAs have had a significant impact on overall employer health cost trends. Employer premiums increased just 3.8 percent last year — and 3 percent in 2010. They were rising at a double-digit annual clip in 2003.

Government health programs, by contrast, have struggled to contain costs in large part because of fraud or otherwise improper payments.

Medicare made nearly $43 billion in such payments in 2011 — equal to $863 for every senior on the program, according to the AHPI study. Improper Medicaid payments added up to almost $22 billion that year — or $392 per beneficiary. The Veterans Administration made $2.2 billion worth of improper payments in 2013 — and has had to pay more than $840 million in malpractice claims to veterans and their families over the past decade.

There’s already widespread concern that Obamacare will add to this pile of wasteful payments. A recent government audit found more than a million applications where eligibility questions such as citizenship and legal status couldn’t be verified. Another million enrollees could be getting more subsidies than they’re entitled to.

Last week, the Government Accountability Office revealed that 11 of 12 fake applications it submitted for subsidized coverage through the exchanges were approved. The ill-gotten subsidies for the 11 fraudulent applications would have amounted to $30,000 a year.

Former Congressional Budget Office director Douglas Holtz-Eakin told Congress earlier this year that Obamacare could end up making $152 billion in overpayments in a decade.

Rather than take on fraud directly, government has tried a different tack toward cost-control. State and federal health programs have opted for top-down price controls and limits on access to care — not the consumerist approach that has worked in the private sector.

Medicare and Medicaid, for example, pay below-market rates to healthcare providers. In 2012, the two programs underpaid hospitals by $56 billion.

Providers respond by charging those with private insurance more. Kaiser found, for example, that private insurers’ payments to hospitals are 30 percent greater than hospitals’ costs.

Such cost-shifting adds more than $1,500 annually to the private insurance premium for a family of four. Without it, the gap between the cost of government coverage and employer coverage would be even greater.

Despite government’s poor track record controlling health costs and employers’ reasonably good one, Obamacare will “by intent or just in effect . . . drive[e] more people from employer-based health care into government-based programs,” the AHPI report concludes.

Indeed, the Congressional Budget Office assumes that 7 million workers will be pushed out of their employer health plans thanks to Obamacare. One of the law’s architects, Ezekiel Emanuel, thinks it will “bring the end of employer-sponsored insurance.”

The AHPI report cautions advocates like Emanuel to be careful what they wish for. Destroying the employer health insurance marketplace — and replacing it with government-sponsored solutions as Obamacare does — may yield higher costs and worse care.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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