De-Linking Health Insurance From Employment

by Robert Maynard

As I mentioned in my recent post titled ‘One Way “listening” Tour Continues‘, a major objective of the current rush to impose a single payer health care system on Vermont is to de-link health care coverage from employment.  This is an idea that advocates of a free market approach to health care reform share with the advocates of a single payer system.  In fact, free market reform advocates have long argued that it was government intervention into the private economy that created this link to begin with.  The link is now supported by special tax breaks and is distorting the private health insurance market and driving up costs.  The real key to de-linking health care coverage is to remove some of the regulatory policies that sustain the link and free up the individual insurance market.

As pointed out in an article titled “The History of Health Insurance In The United States”:

Employee benefit plans proliferated in the 1940’s and 1950’s. Strong unions bargained for better benefit packages, including tax-free, employer-sponsored health insurance. Wartime (1939-1945) wage freezes imposed by the government actually accelerated the spread of group health care. Unable by law to attract workers by paying more, employers instead improved their benefit packages, adding health care.

What followed was direct government involvement in the health care market:

Government programs to cover health care costs began to expand during the 1950s and 1960s. Disability benefits were included in social security coverage for the first time in 1954. When the government created Medicare and Medicaid programs in 1965, private sources still paid 75 percent of all of the health care costs. By 1995, individuals and companies only paid for about half of the health care with the government responsible for the other half.

As the market for individual health insurance was crowded out by company provided health insurance and government provided health care, the costs of health care began to rise rapidly: “During the 1980’s and 1990’s, the cost of health care rose rapidly and the majority of employer-sponsored group insurance plans switched from “fee-for-service” plans to the cheaper “managed care plans.” As a result, most Americans with health insurance were enrolled in managed care plans by the mid-1990s.”

Advocates of health care reform point to the rising cost of health care and conclude that our supposedly free market approach to health care does not work.  The argument drawn from this conclusion is that real health care reform involves moving away from a private health care market to a more government directed and controlled health care market.  The problem is that this is exactly what we have been doing for several decades and the result has been an exponential increase in costs.  The U.S. health care market has long ago ceased to be a “free market”.  According to a Cato Institute Policy Handbook on “The Tax Treatment of Health Care“, there is $2.5 trillion in America’s health care sector.  The question they ask is who controls that money?

Many presume the U.S. health care sector to be a free market because the private sector plays a greater role in it than in other advanced countries. It is an error, however, to assume that a market is free because it is private.  Government can exert as much control over the private sector as the public sector, simply by ordering private individuals and firms to apply their resources toward the government’s goals rather than their own. The fact that the U.S. health care sector is more ‘‘private’’ and less ‘‘public’’ than other nations’ therefore tells us little about whether that market is free or unfree. What matters—what determines real as opposed to nominal ownership—is who controls the nation’s medical resources.

As of the study in question, 43% of it is controlled by government, 28% by employers, 26% by consumers and 3% by “other private”.   According to the study: “One of the most far-reaching and damaging ways that government controls private-sector health care is through tax laws. The federal government exempts certain health- related uses of income from income and payroll taxes. The largest of these tax breaks is the exclusion of employer-sponsored health insurance from income and payroll taxes.”  This creates a burden for those who do  not get their health insurance through their place of employment:

Workers who do not obtain health insurance in an employment setting face a concomitant tax penalty when purchasing coverage. They must purchase insurance with income that has already been taxed at marginal rates as high as 50 percent. As a result of the tax break for employer-sponsored insurance, consumers who seek to choose their own health insurance plan must often pay twice as much for less coverage. That hefty tax penalty discourages many workers from seeking insurance on the ‘individual’’ market.

Interestingly, those workers wh do get their insurance through their place of employment are not getting as good of a deal, as one would suspect:

Even for workers with employer-sponsored health insurance, this tax break operates more like a tax increase. A survey by economists Michael Morrisey and John Cawley found that 91 percent of health economists agree that the money that employers use to purchase health insurance comes out of workers’ wages. In other words, if employers were not providing health benefits to workers, they would have to return that $9,000 to workers in the form of higher cash wages. That implies that, rather than encourage employers or shareholders to spend their own money on workers’ health benefits, this tax break instead gives employers control over a significant portion of their workers’ earnings.

The study proposes several ways to free up the tax code to create a freer market and give individuals more control over their health care dollars.

In addition to using the tax code to create incentives that distort the health care insurance, regulations are another way that this market has been ruined to the detriment the individual health care consumer.  Two prominent examples are related reforms referred to as “community rating” and “guaranteed issue”.  Vermont is one of eight states that wrecked their health insurance market with such ill-advised “reforms”.  We are now trying to fix the damage done to the health insurance market by excessive government meddling with yet more excessive government meddling.  The tragedy is that our political leaders are not even looking at genuine free market approaches to undo the mess created by continuous government intervention.  It would be laughable if it was not so tragic.



5 thoughts on “De-Linking Health Insurance From Employment

  1. Dan, I watched the Pelosi clip. Little do members of her audience realize that, under socialized medicine, a trip to the hospital for a minor ailment, could have them lined up for days on end awaiting admission. Naturally during such a time they would be barred from the instruments or paraphernalia of their craft. One could say that they would be temporarily relieved of their freedom to be artistic. Probably she has figured out that the unemployment benefits would more than compensate.

  2. Imagine an enterprise where it is in nobody’s interest to conserve limited resources. Under government controlled health care hospitals become the adopted offspring of the government – wallowing in their own waste, chronically underfunded, under staffed and bankrupt. Vermonters should realize that the elimination of free market health decisions would result in such an outcome. After all, are they not wise enough to learn from the experience of others? Eh?

  3. Great synopsis. For a detailed account from a physician’s perspective, I recommend the reading the late Dr. William Water’s book, “2 days that ruined your health care”,

    There are potential pitfalls from decoupling health care payment coverage/insurance from employment to receive subsidized health care. Will it lead to some spouses giving up their jobs or will some take less demanding/lower paying jobs if health care becomes very low cost or free, when household income falls to within a certain range, where what one gains in subsides compensates for lost income. Quitting your job for “free” health care reminds me of:
    Unfortunately this distortion will create an even bigger burden for those paying a disproportionate amount to finance the health care system.

  4. Thanks Robert for your excellent research and presentation. As you wrote, it would be laughable if it was not so tragic. How true.

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