Should Health Insurance Come From Employers? Spoiler Alert: No.

I’ve got a riddle. Q: What do you call something that goes away when you need it the most? A: Employer-sponsored health insurance. Hey, I didn’t say it was a funny riddle.

Yet, as 17 million people have lost their jobs because of Coronavirus related closings, many have also lost their health insurance. The reason is simple. In the U.S., the majority of working age Americans get their health insurance from an employer. Either their employer, or their spouse’s.

And just in case you think that this result is somehow intentional, the podcast below should dissuade you. Basically, we have employer-sponsored insurance first and foremost because it’s cheap to insure workers (you know, because they ain’t usually sick). Then, during WWII, when employers couldn’t raise wages because of price ceilings, employers instead attracted workers through benefits like health insurance. Then, employers got a tax break for offering this kind of benefit. The rest is history.

Accidents Of History Created U.S. Health System

If you want to understand how to fix today’s health insurance system, you’d be smart to look first at how it was born. How did Americans end up with a system in which employers pay for our health insurance? After all, they don’t pay for our groceries or our gas.

Of course, just because it’s an accident, it doesn’t mean its bad. Heck, the invention of beer was an accident, and beer rules. I mean, if employer-sponsored health insurance was a good way to distribute health insurance to everyone, it might be OK. Or, if not, if it were somehow very efficient. Or, at least cheap. Of course, in reality, it’s none of those things.

Employer-sponsored Health Insurance is Unequal

The first reason employer-sponsored health insurance is unequal is because not everyone works. In 2018, about 78 percent of adults age 25 to 64 (the age before Medicare kicks in), were in the labor force. And 2018 was a good economic year. 2020 is not a good economic year. While people who don’t work might be able to get health insurance through a spouse but, as I’ve talked about before, marriage is declining especially for the poor.

Instead, Medicaid sometimes fills the gap for people who are very poor and don’t work. Of course, in some states, this option isn’t available for people without kids. For those who are less poor, the Obamacare Individual Marketplaces might offer an option. Then again, the Trump Administration hasn’t made it a priority to improve those markets. And, the administration hasn’t exactly made enrolling any easier, even for people who have lost their jobs due to the Coronavirus.

OK, but what if we only care about people with jobs? At least these people get insurance. Right? Nope. The figure below shows that health insurance access is much higher for people in high paying jobs. So, the people that can most afford to pay for healthcare even without insurance, are also the most likely to have it. Yikes.

Figure 1. Share of Private Sector Employees with Access to Health Insurance in 2016, by Wage Category

Source: U.S. Bureau of Labor Statistics. https://www.bls.gov/spotlight/2017/employer-sponsored-healthcare-coverage-across-wage-groups/home.htm

OK, so employer-sponsored health insurance doesn’t guarantee everyone gets health insurance, even workers. But maybe it’s a really efficient way to provide insurance. And maybe tomorrow I’ll dunk a basketball.

Employer-sponsored Health Insurance Introduces Inefficiencies

Having employers provide health insurance isn’t just unequal, it causes workers to make inefficient choices. Have you ever thought to yourself, “I’d like to switch jobs, but this one has good health insurance?” Then you have fallen victim to something called “job lock.” Basically, you have been forced to stick it out in a job you don’t like.

So, is the effect big? Yeah. In a classic paper, the finding was a reduction in mobility of 25 percent. Others have found bigger estimates, and a few smaller ones. In any case, this reduction in mobility matters. Economists have long noted that job switches are a major driver of wage growth. So, employer health insurance doesn’t just result in inequality, it holds people in jobs they may not like at wages that might not be as high as the could elsewhere. But, at least it’s cheap right? Wrong.

Employer-sponsored Health Insurance is Expensive

When your employer gives you health insurance, it may seem free. I mean, who looks at their paycheck anyway. Rest assured, it’s not free. First of all, as the figure below shows, you pay for it. In 2019, the average employee contributed $6,015 dollars towards their family health insurance plan (it is less for individual coverage) out of their wages. As the figure below shows, that’s up 71 percent from 2009. Know what’s not up by 71 percent since 2009? Income.

Figure 2. Average Annual Worker and Employer Premium Contributions for Family Coverage

Source: Kaiser Family Foundation Health Benefits Survey, 2019; Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2009 and 2014.
https://www.kff.org/report-section/ehbs-2019-summary-of-findings/attachment/figure-a-36/

OK, but at least employers contribute the majority, right? Maybe. Then again, the employer contribution just reflects what you don’t physically hand over out of your paycheck. Of course, its extremely likely that your employer is paying you lower wages than they would if they weren’t paying $14,500 for your health insurance. In other words, the employer probably passes through some of the cost to you in the form of lower wages. The end result is that you pay for your employer-sponsored health insurance — if your lucky enough to have it — in two ways. Once directly, and once indirectly through lower wages.

Conclusion

Employer-sponsored health insurance is an unequal, inefficient, and expensive accident of history. Maybe the only nice thing about being locked in our houses is that it gives us a chance to reflect on things. Do we want health insurance tied to employment, when an unforeseen event can so easily take it away? Probably not.

Of course, the better system isn’t obvious. Certainly, the Medicare program is popular, and expanding it to all workers would solve this problem. But, implementing “Medicare for All” could be expensive. Then again, if you have employer-sponsored health insurance, you now know that you are already paying a lot. Would Medicare for All cost more…or actually save money by ridding us of these payments out of our checks and out of our pay? It’s actually unclear. Some economists estimate it could be more expensive, while others estimate it would be less expensive.

Honestly, I don’t know the solution, and that isn’t the point anyway. The point I want to make is simpler: the system we have now isn’t isn’t intentional, isn’t equal, isn’t efficient, and it isn’t cheap. We can do better. Will we take this chance to figure out a way?

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