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.¹  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.²  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 percent 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.

As the chart below shows, those with the lowest incomes get the smallest share of this generous tax subsidy.⁵   Because it is tied to the progressive income tax system, the invisible tax break for health insurance is most valuable to taxpayers in the highest tax brackets and least valuable to those in the lowest brackets.
 

Source: The Lewin Group estimates using the Health Benefits Simulation Model (HBSM). Note: The average per family is $1,748.

 
As Senate Finance Committee Chairman Max Baucus (D-MT) wrote in a recent policy paper, the current system gives⁶  “larger subsidies to higher-income workers, instead of to the lower-income Americans who need more help buying insurance.”

Further, this invisible tax preference for generous insurance for the most affluent workers drives up the cost of health insurance, often pricing it out of range for people of more modest means who must purchase insurance on their own with after-tax dollars.

Next steps: Much of the action in Congress and the incoming Obama administration will be around expanding access for lower-income uninsured Americans to government health programs such as Medicaid, Medicare, and the State Children’s Health Insurance Program. But that leaves decisions about health care in the hands of politicians and bureaucracies, not individuals and families. As we have seen, that means they will be in public programs that pay for contraception, sterilization, and abortion.

Other proposals involve forcing employers to provide and pay for health insurance for their workers, likely causing marginal companies even greater economic distress and surely forcing many to lay off workers rather than provide health benefits they can’t afford.

Providing greater access to health insurance doesn’t have to involve mandates on employers or putting more people into government programs where politicians and bureaucrats, not patients and families, are making health care decisions. There is a better way.

What we should do instead:  Congress and the new administration could dramatically expand access to private health insurance that protects freedom of conscience and that allows people to select policies that are in keeping with their beliefs and values. It involves three key steps:

 

1.    Providing new subsidies to individuals to purchase private health insurance and achieving universal coverage

2.    Creating new markets for affordable, portable insurance

3.    Protecting those with pre-existing conditions so they can purchase and maintain insurance coverage.

1. New individual subsidies: Instead of the invisible subsidies currently provided to support job-based health insurance, all Americans not eligible for Medicare, including the currently uninsured, would receive direct credits to help them purchase private insurance. The subsidies could be in the form of direct vouchers or tax credits that would be refundable so people would be eligible for the full value even if they don’t owe taxes.

The credits could be used only to purchase insurance, but people would have a range of options from which to choose. The great majority of Americans likely would continue to choose to receive their health insurance at work; replacing the current tax exclusion for job-based insurance with the new tax credit would be little more than a bookkeeping change for them.

A family credit of $5,000, for example, would be worth more to the great majority of Americans than the currently invisible and regressive tax break, which is worth little or nothing to minimum-wage workers (but $4,200 or more to a high-income family). Because the new subsidy would be in the form of a voucher or credit, and not a deduction, it would be worth much more to people at the lower end of the income scale. 

Importantly, the credit would give families much more control over their health benefits and would allow health insurance to be portable so people don’t have to lose their insurance if they lose or change jobs.

Achieving universal coverage:  If the credit were universally available, it could be a mechanism to provide health coverage to everyone, without having a government-dominated health system. Here’s how:

People would have the option of selecting a plan that suits them and their families, using the credit to defray premiums. Some may choose to supplement the credit and buy more generous coverage.

But even those who don’t take action to buy a policy could have one assigned to them, thereby obtaining insurance by default through one of the health plans offering private policies in their region. If this person were to show up at a doctor’s office or hospital needing care, the records would show that the person does indeed have insurance, with premiums paid by the credit for which they are eligible.

Some argue that a $5,000 credit won’t cover even half the cost of a typical policy people get through their jobs, which can cost $12,000 or more for a family.  But the credit is replacing only the tax break people currently receive. The amount that employers and individuals have been contributing would be added to the pool of funds to make those with job-based coverage come out even, or in many cases, ahead.

Wise policymakers would provide supplementary payments to help those with low incomes and high health risks who lack employer supplements to pay their premiums. 

Seeking value pricing: When people purchase health insurance on their own, they seek greater value in the policies they buy. The average price of a policy purchased in the individual market is less than $2,000 a year for individuals and $4,500 for a family, less than half the cost of job-based policies. A $5,000 family credit would more than cover this cost.⁷

The great majority of people who have job-based insurance today would most likely keep their current coverage because their incentives would not change. But people shut out of the job-based insurance system or who prefer to buy health insurance on their own would for the first time have an equal tax subsidy for doing so.

The tax change, therefore, would lead to more consumer choice in health insurance arrangements. Because millions more people, armed with the credit, would be in the market for insurance, competition would be stimulated. Health plans would be forced to compete for the business of consumers by offering better services and greater value.

2. Interstate purchase of health insurance:  We recommend a system in which people would be able to purchase health insurance in a national market that is more competitive and offers more options in policies. Opening the health insurance market to nationwide competition would give people many more choices of policies that aren't burdened by expensive state mandates and regulations. Those regulations drive out competition and drive up prices in the current system.

Economists Steve Parente, Roger Feldman, Jean Abraham et al showed in a University of Minnesota study that opening up competition among the states for health insurance would mean an additional 12 million people could get health insurance, without any new spending by the federal government.⁸ 

People could choose the best plan for them and their families and, by their choices, would put pressure on companies to wring out excessive overhead costs and offer innovative plan options.⁹ 

In a reformed marketplace, people would seek other groups, such as professional and trade associations and churches, through which they could purchase health insurance to receive group discounts. This would lead to better continuity of coverage and care and greater control over choosing health insurance benefits and providers.

Portability of the subsidies for health insurance leads to greater security in health coverage since people would have control over their policies. Further, patients wouldn't be forced to change from one doctor or one network to another when their employer changes insurers or when they change jobs.

A competitive marketplace would force insurers to provide adequate benefits to attract and keep customers. In a larger national market, individual consumers, rather than government bureaucrats or legislators, would decide what benefits and policy structures they want.

3. Guaranteed Access Plan:  While more than 10 million people buy health insurance in the individual market today, many others find it difficult if not impossible to find an affordable policy. Critics have raised concerns that giving people more freedom to purchase health insurance outside the workplace would mean these higher-risk individuals would be denied coverage, especially if they have pre-existing conditions or otherwise have trouble getting insurance.

A non-profit Guaranteed Access Plan, governed by a board of citizens, legislators, business, and medical community leaders, could provide a non-governmental solution. The GAP board would contract with insurers to cover patients who have been denied insurance, and they could join with other state plans to enlarge pools and lower overhead costs.

These plans also should be given new incentives to reduce costs through programs such as disease management, individual case management, and health and wellness programs. Disease management programs reach out to people who are at risk for certain diseases and chronic conditions and provide them with care managers and specialized support to make sure they receive the proper care.

Finally, the federal government could establish new payments to the states to support their high-risk pools and provide guidance in setting up these pools so they are able to provide a safety net for people who still are unable to purchase or afford coverage. These policy proposals build on the current system and fill the gaps with new incentives, subsidies that are better targeted, and new programs to assist those who are being left behind in the current system.

Achieving universal coverage by building on the current system

 
*Medicare continues to cover the disabled and those over age 65.

There is an alternative to expansion of a politically controlled, government-run health system that can still provide health insurance coverage for all Americans and allows them to follow their conscience and values. The formula involves putting people and families first, providing them with new resources to purchase coverage, creating a more efficient market for insurance, and providing a strong safety net for those who have high health risks, low incomes, or both.

Communications Director Amy Menefee and Research Director Tara Persico assisted in producing this paper.

 

¹  Edward Kleinbard, “Tax Expenditures for Health Care,” Testimony before the Senate Committee on Finance, July 31, 2008, at http://finance.senate.gov/hearings/testimony/2008test/073108ektest.pdf.

²  “Job openings and labor turnover: November 2006,” Bureau of Labor Statistics, United States Department of Labor,
January 10, 2007, at http://www.bls.gov/news.release/archives/jolts_01102007.pdf.

³  The Council for Affordable Health Insurance, “Understanding the Uninsured and What to Do About Them,” March 2007, at http://www.cahi.org/cahi_contents/resources/pdf/UnderstandingTheUninsured0307.pdf.

⁴  “The Missing Perspective,” Council for Excellence in Government, Accenture Institute for Public Service Value, and The Institute of Medicine of the National Academies, October 2008, at http://ceg.files.cms-plus.com/TownHalls/The_Missing_Perspective_(full).pdf.

⁵  John Sheils, “The Tax Expenditure for Health: Update for 2007,” The Lewin Group, April 29, 2008, at http://www.newamerica.net/files/SheilsPPT.pdf.

⁶  Senate Finance Committee Chairman Max Baucus, “Call to Action: Health Reform 2009,” p. 81, November 12, 2008, at http://finance.senate.gov/healthreform2009/finalwhitepaper.pdf.

⁷  “Cost and Benefits of Individual and Family Health Insurance Plans,” eHealthInsurance, November 2008, at http://www.ehealthinsurance.com/content/expertcenterNew/eHealthCBreport2008FINAL.pdf.

⁸  Stephen T. Parente, Ph.D., Roger Feldman, Ph.D., Jean Abraham, Ph.D., and Yi Xu, B.A., “Consumer Response to a National Marketplace for Individual Insurance,” University of Minnesota, June 28, 2008, at http://www.hsinetwork.com/National_Marketplace_7-21-2008%20FINAL_Blind.pdf.

⁹  “Healthy Access Plan,” National Association of Health Underwriters, at http://www.nahu.org/legislative/healthyaccess/plan.pdf.