It's time to rethink the employer-sponsored health insurance model
Published June 18, 2020
As our country looks to rebound from the coronavirus, it’s fair to say we may change things we considered normal. Office workspaces could gradually transition more into remote working, massive social gatherings could be subject to additional safety measures, and retail shopping could have a different look, to name a few. Another example of something familiar to the American people that I believe needs to be reevaluated: the employer-sponsored health insurance model.
Employer-sponsored health insurance was born out of wartime regulations during World War II. To keep price inflation low, the federal government-imposed wage freezes on employers. At the same time, the federal government exempted health benefits from taxation so that businesses could stay competitive in hiring. Combining these policies ushered in the contemporary model of employer-sponsored health insurance that about half of American’s are enrolled in today.
While some benefits are offered by the employer-sponsored health model, health insurance should be disentangled from employment for two reasons. First, businesses, especially those with self-insured plans, are charged arbitrary, often exorbitant rates that don’t correlate to any quality or value. The result is employers overspend by thousands each year. Second, while changes to employment happen often, the need for health care does not. If an employee changes jobs or loses their job, they may lose needed health coverage.
Unwinding health insurance from employment would likely reduce health care spending, thereby reducing the cost of insurance. According to the Kaiser Family Foundation, the average family premium in 2019 rose to $20,576, with workers paying, on average, $6,015 of the total cost. Baked into these costs are the brokerage fees and administrative costs inherent in health insurance. As the cost to employers has increased, employers are shifting more of the costs on employees in the form of higher deductibles. KFF data shows the percentage of employees covered by a health plan that has a deductible of $2,000 or more rose from 18% in 2014 to 28% in 2019.
So much spending in employer-sponsored health care surely equals high-quality, high-value care, right? Not quite. One of health care’s central paradoxes is that prices usually aren’t signals of quality or value. Furthermore, in any given metropolitan area, there could be two employers paying vastly different rates for the same procedure with very little difference in quality. For example, a study from the RAND corporation examined $13 billion in hospital spending from 2015-17 in 25 states. The researchers found that hospital prices, especially for outpatient services, varied widely among hospital systems by as much as six times what Medicare would pay for the same service.
To illustrate, consider a midsize firm with a self-insured employer plan. Self-insured means the firm doesn’t pay premiums to a health insurance company and instead pays for claims directly, but an insurer usually administers these plans. Let’s say the company’s employees needed 50 MRIs last year. The company is in a city that has three different providers offering MRIs. Provider A’s MRI costs $3,000, provider B’s MRI costs $1,500, and provider C’s MRI costs $500. Of the 50 employees who need an MRI, 20 went to provider A, 15 went to provider B, and 15 went to provider C. The total amount for these claims was $90,000. Now imagine if every one of these employees went to provider C. The total amount for these claims would be just $25,000. This employer could have saved $65,000 only by steering patients to a low-cost provider for MRIs. This was only one example, using an MRI. It’s not hard to imagine how much cost savings could be found if a similar analysis was done on all the claims of this firm.
Furthermore, stay-at-home orders and mandatory business closings have resulted in widespread unemployment at levels not seen since the Great Depression. Since half of Americans get their insurance from work, job loss could mean the loss of employer-sponsored insurance. This happens because employers, not employees, own the health plan in most cases. Despite the benefit of having employer-sponsored insurance as opposed to buying your own, the model leaves employees vulnerable. While the COVID-19 pandemic is a rare case, it illustrates the primary shortfall of tying insurance to employment: Employment status can change abruptly, causing employees to lose coverage. This wouldn’t be the case if health insurance wasn’t tied to one’s job.
I believe it’s time to get employers out of the business of providing health insurance. The federal government should reverse policies that created a system of employer-provided health insurance. For years, employer-sponsored health insurance costs have increased. Employers are spending unnecessary amounts each year on procedures in which the cost has no relationship to quality or value. Employees are typically the ones who end up assuming the rising health care costs in the form of higher out of pocket costs and lower wages. As we move toward a post-COVID world, employer-sponsored insurance is a model, which, I believe, needs to be reconsidered for the good of employees, employers, and the health care system.
Jordan Roberts is health care policy analyst for the John Locke Foundation.