Health Care: Get Rid Of Employer Coverage

One last fling at the end of a busy week: I want to draw your attention to an excellent op-ed in today’s Financial Times arguing against the way in which most American consumers get their health care insurance.

In brief, here’s the argument:

• The provision of health care by an employer puts a financial strain on business that ultimately undermines its competitive position vis a vis foreign companies who are not similarly burdened. See GM for details.
• It undermines wage growth. The article omits this, so let me add it. Employers, naturally, look at the total cost of an employee, not just wages. The cost of health care is a large part of such a total cost. If a business wants to limit the rate of growth of that cost it must balance the share it puts into wage increases against the rising cost of health care insurance. Consequently, if health care costs rise quickly employers will be forced to limit wage increases in order to pay for the health care benefit. Studies show that this ‘squeeze’ effect has reduced average US wages by about 6% so far and will reduce them even more in the near term. Especially if the cost of heath care is not brought under control.
• The provision of health care through an employer exposes an worker who loses his or her job to ‘double jeopardy’: not only do they lose their source of income, but they lose their health care coverage right when their family is most exposed to economic harm. This is ridiculous.
• Since the money used by businesses to pay for health care coverage for employees is exempt from taxation the government loses a huge amount of revenue – corporate tax revenues have slumped in recent years in large part due to the rapid increase of this tax exemption. Reversing this tax loophole would more than offset the additional cost implied by the extension of the government plan.
• The cost burden is especially heavy on small businesses who are unable to take advantage of ‘scale’ in their dealings with health care insurance providers. The rising cost of health care has caused an increasing number of small businesses to cease offering a health care plan. Since most Americans work for small companies this has had the effect of increasing the number of people who are not covered at all.
• By linking employment and health care coverage the system introduces another inefficiency: every time an employee changes employers they run the risk of entering a new plan and thus having to change doctors etc. This helps explain why Americans have the lowest continuity of contact with their doctors, which is regarded as a major source of degradation of care. All that chopping and changing also adds to the administrative cost of the system.

At the end of the day there is no good defense of the employer based system. It fails on so many levels. Yet in the current debate eliminating it was one of the first things removed form discussion. This is absurd.

But absurdity is a common theme throughout our health care system, so I shouldn’t be surprised.