Providing coverage for all through private health insurance

The United States is unique in the developed world in that the majority of Americans have private health insurance that they receive through the workplace.

This is not the result of a deliberate decision but rather policy that evolved as the unintended consequence of a World War II ruling. Factory owners were competing to lure and keep good workers and wanted to offer health insurance as a benefit, but they needed the government’s assurance that this wouldn’t violate wartime wage and price controls.

The Office of Price Administration allowed the benefit, and this has evolved into a policy that later was codified into the Internal Revenue Code allowing employers to offer health insurance as a tax-free benefit.

This system of tying health insurance to employment has worked tolerably well for half a century during a time when people had stable jobs and health costs were manageable. Now, it is breaking down in an economy where people change jobs much more often and where rising health costs are straining company budgets.

But there are many other reasons to rethink the current system of subsidizing health insurance through the workplace to see if it is adequate for a 21st century economy. Tying health insurance to the workplace leaves out an estimated 45 million people because they don’t receive or can’t afford coverage at work. And, most importantly, it provides very generous subsidies for the most affluent workers and little or nothing for those at the lower end of the income scale.

There is a better way. We could provide direct subsidies to individuals to purchase health insurance of their choice – policies that they can own and keep with them as they move from job to job. This would give them continuity of coverage and more control over selecting health policies that fit their needs, pocketbooks, and values.

How the current subsidy works:  When people get health insurance through their jobs, the part of their compensation package that they receive in the form of health benefits is exempt from federal, state, and payroll taxes.

The open-ended tax subsidy for employment-based health insurance is now the largest single tax break in the federal budget. Edward Kleinbard, the top economist for the Joint Tax Committee in Congress, says that tax subsidies for private health insurance now total more than $300 billion a year. These subsidies are invisible to most people, and they lead people to believe that health insurance is a gift from their employers. That provides incentives for people to demand more and more generous health insurance policies, generally at the expense of higher cash wages.

Why it isn’t working any more: Four in ten workers change jobs every year, according to the Labor Department.  Tying health insurance to the workplace means that more and more people lose their health insurance when they lose or change jobs. An estimated 45%  of the uninsured are without insurance for four to six months,3  largely because they are between jobs or have not yet qualified for insurance at their new place of work. This situation will only get worse in a faltering economy.

Providing people with other options for portable insurance would go a long way toward solving the problem of the uninsured. A survey by the Council for Excellence in Government4  found that 78% of Americans say they want portable health insurance that they can take with them from job to job.

But the current subsidies for job-based health insurance are unfair in other significant ways, particularly in the way they discriminate against those with lower incomes.
 

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