Americans rendered jobless by COVID-19 have lost more than just their incomes. An estimated 12.7 million people have also lost their employer-provided health coverage since the beginning of the pandemic.
The crisis has driven home the imprudence of tying health insurance to employment. Our system not only makes coverage precarious but also inflates costs and reduces consumer choice. It would be better to devolve power to individual consumers and allow them to own insurance policies they can take with them from job to job.
America’s employer-based system is an accident of history dating back to World War II, when the federal government blocked companies from boosting wages to attract scarce workers. In response, companies began offering non-cash benefits, particularly health insurance, to compete for talent. In 1943, the IRS exempted health benefits from tax.
The system has resulted in a host of unintended consequences. The most obvious is that a job loss can be catastrophic. The insult of lost income is accompanied by the injury of lost health coverage.
The employer-sponsored model has also inflated U.S. health spending. Individuals don’t perceive the true cost of the care they consume. After all, the average employer picks up more than 80% of individual plan premiums, and 70% of family premiums.
Further, the value of employer-sponsored health benefits is excluded from income tax. So a dollar of health benefits is worth more than a dollar of wages. An individual with employer-sponsored coverage may feel like he’s paying a little less than 20 cents for each dollar of health benefits he receives. Understandably, this leads consumers to demand—and consume—more care than they might if they were responsible for its full cost.
Employers are loath to push back, lest they drive employees away. Providers are more than happy to accommodate this demand by charging higher prices or offering more services.
The result is escalating costs. In the last six years, the average premium for an employer-sponsored family plan rose by 22%—far greater than the rate of wage growth or inflation. Last year, annual premiums for family plans averaged more than $20,000 for the first time.
There’s also a lack of choice baked into the employer-sponsored model. Workers are often limited to a single coverage option, or plans from a single insurance provider.
Policy wonks on the left and right have been pushing to decouble insurance from employment for years. Many on the left are pointing to the economic disruption caused by the pandemic to justify a move to Medicare for All. That’s the wrong approach for a number of reasons.
For starters, it would increase federal spending by more than $32 trillion over 10 years. Doubling federal income and corporate tax receipts would be insufficient to cover that tab. Medicare for All would also leave many people worse off—more than seven in 10 working privately insured households would pay more under single-payer than they do under the current system, according to Emory University economist Kenneth Thorpe.
Single-payer’s supporters also envision paying healthcare providers Medicare’s rates in order to rein in the cost of their program. But that would lead to shortages in the supply of care.
Consider—early in the coronavirus outbreak, numerous labs were unable to screen COVID-19 tests at their maximum capacity because Medicare’s payment rates were too low to cover their costs. Medicare eventually doubled its rates, but only after two weeks of dithering.
Medicare’s rates are about 40% less than those paid by private insurance. If they were extended across the entire healthcare system, scores of hospitals and doctors’ practices would close, unable to cover their costs.
The Trump administration has taken steps to weaken the link between employment and health insurance. Take Health Reimbursement Arrangements, which allow employers to give their employees untaxed dollars they can then use to purchase individual plans.
It’s simpler for the employer and the employee, who can choose a policy that suits his or her needs. Employees can also take those policies with them when they leave their jobs. Putting individuals in charge of their own healthcare dollars will also increase competition, as insurers face the challenge of competing for consumers’ business. That will yield lower costs and better quality.
For the millions of Americans who are currently unemployed, short-term, limited duration plans can provide more immediate access to coverage. Short-term plans can last up to a year, can be renewed by insurers for up to three years, and don’t have to include coverage of expensive benefits the consumer doesn’t want or need.
The COVID-19 pandemic has underscored the dangers of employer-sponsored coverage. But a government healthcare takeover isn’t a sensible response. What patients need is a model that severs the link between health coverage and employment, while bringing down costs through choice and competition.
Sally C. Pipes is president, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. Her latest book is False Premise, False Promise: The Disastrous Reality of Medicare for All, Encounter Books, January 2020. Follow her on Twitter @sallypipes.