Health Care: Unshackle the job-lock
Unshackle the job-lock
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- Economist.com | NEW YORK
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- Health care
AROUND 46m Americans lack health insurance, and as the unemployment rate rises more will join the ranks of the uninsured. Employers stop paying for health care when a worker is let go. The insurance company must give the new job hunter the option of paying premiums himself for several months, or until he finds another alternative. But, if his employer goes bankrupt and ceases to offer its health plan, his coverage also ends.
The current system has the advantage of pooling risk. That means employers can pay less to cover their employees than if an individual went at it alone. And the American government provides tax breaks to firms offering health care. Barack Obama’s proposal to extend coverage would make employer-sponsored plans mandatory for all but very small firms.
But even in a better job market, health care through your employer is not ideal. The most efficient labour markets are flexible and Brigitte Madrian and Jon Gruber found that employer-based health insurance has a significant impact on a worker’s decision to leave his job. Though no one has yet quantified the impact on welfare from a health-care “job-lock”.
In an op-ed in yesterday’s Wall Street Journal, Ezekiel Emanuel and Ron Wyden claim a system with portable benefits would also make the health care industry more efficient. They propose an alternative to the current system:
Such a system could be implemented today by creating state or regional insurance exchanges that pool individuals and small groups to pay the same lower prices charged to larger employers; that certify that all insurance benefit packages meet minimum consumer protection standards; that manage the enrollment process; that collect premiums; and that require insurance companies to issue and renew coverage for anyone who applies, protecting the insurers by paying them a risk-adjusted premium that pays them more when they enroll sicker, more costly, patients.
Fundamentally, this means that insurance companies would have to change their business model to compete on the basis of quality, price and benefits, rather than by “cherry picking” the healthiest people to cover. It means spending less money on administrative costs and more money on keeping patients healthy. And it means letting everyone keep the health insurance they have if that’s what they want, but giving all employers and employees more choices for their health care.
It’s not clear if purchasing insurance would be mandatory under their proposal. If not, the insurance market would be riddled with adverse selection. Nonetheless, it’s an interesting idea.
Even during the halcyon days of moderation, the labour market became more mobile. In those days there seemed to be increased rates of voluntary separation and more temporary jobs that did not include benefits. The pension market provided portable pension plans. Health care should follow suit.
(Photo credit: AFP)
http://www.economist.com/blogs/freeexchange/2008/12/unshackle_the_joblock.cfm
Working people are healthier and cheaper to insure as healthier. It’s healthier for insurers to encourage rather than discourage work, and if state-pooled insurer compensation was risk-adjusted correctly, health care providers would have incentive to encourage people to work and remain healthy (rather than voluntarily become unemployed).
Some of the “voluntary separation” that creates uninsureds is “voluntary” in legal terms only, where, in name the unemployed had little choice as better incented to leave with some minimal benefits or stock than to be fired and lose stock rights or other payouts. This system would improve their prospects of new employment where they were less likely to suffer ill effects (adverse helath and adverse credit shocks) of lack of health care during some period of unemployment.
The rate of start-up and small business failure due to adverse health costs shocks by small business owners and workers has become so large as to be prohibitive for capital and business formation. This proposal would cure that iniquity thrown against start-ups so necessary to our economic health.
McKinsey’s $75 billion waste estimate could buy a tremendous amount of additional wages for large company employees. Those wage increases could translate into savings that allowed the same employees to self-insure at other phases of their careers.
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Why Tie Health Insurance to a Job?
One thing we can all agree on is that portable coverage is more secure.
By EZEKIEL J. EMANUEL and RON WYDEN
Not many people are buying cars built 60 years ago. No one is watching TV on a set manufactured in the 1940s. Patients are not lining up to see a doctor who hasn’t cracked a book since before the polio vaccine was discovered. Why, then, do millions of Americans get their health care through an employer-based system from the 1940s?
Employers didn’t start offering health benefits roughly 60 years ago because they were experts in medical decisions. It was a way of circumventing the World War II wage and price controls. Barred from offering higher salaries to attract workers, employers offered health insurance instead. Aided by an IRS ruling that said workers who received health benefits did not have to pay income taxes on them, and by the fact that employers could write off the cost of the health benefits as a business related expense, this accidental arrangement became the primary way most Americans access health care.
The system worked at first, but a lot has changed in 60 years. Back then, the average soldier returning from World War II took a job with a local company where he would work for decades until he got a gold watch at a big retirement party. Today, lifetime employment is dead. By 42, the average American will change jobs 11 times.
Sixty years ago, most American companies competed only against neighboring companies for lucrative contracts. Today, most businesses are up against foreign companies that don’t foot the bill for their employees’ health-care costs.
Today, health-care costs are increasing at twice the rate of inflation. To stay in the black, companies are forced to raise their employees’ premiums and deductibles, opt for cheaper insurance plans, or worse yet, drop health benefits altogether. Since 2000, the percentage of employers providing health insurance has declined by nearly 10%.
For too many, the employer-based system is inefficient. Each employer purchases health insurance separately. According to a recent estimate by the McKinsey Global Institute, this adds more than $75 billion in underwriting, marketing, sales, billing and other administrative costs that offer no health benefits. More than half of all American employers who offer health-care benefits don’t offer their employees a choice. Consequently, most Americans don’t have the option of giving their business to insurance companies that treat them well and only cover what they need. This prevents the usual market forces from holding down costs.
Workers are the ones paying for this waste. The money that employers are spending to buy health care for their employees could otherwise go to workers in the form of higher wages, empowering individuals to make their own health-care choices.
The currently available alternative to this employer-based system is even more horrifying. Individuals buying insurance don’t have the same purchasing power as large businesses and end up paying much higher prices to cover administrative costs and risks. They also don’t get the tax breaks that employers get for buying health insurance. In most states, insurance companies have the right to discriminate against individuals by denying coverage or charging astronomical prices to anyone with a pre-existing condition. It is no surprise that, when given the choice between the employer-based system and buying health insurance on their own, the vast majority of Americans reject the latter. (A Kaiser Health Tracking Poll this summer, for example, found that only 17% of Americans said they would prefer to buy insurance on their own.)
But this is a false choice. It assumes that the current system is the only option. Why can’t Americans have the best of both worlds?
Americans need some of the benefits of the employer-based system: the security of being part of a large group, of not being denied coverage because of age and pre-existing conditions, and the convenience of having experts screen qualified plans and manage enrollment. But Americans also need portable insurance — coverage that follows them when they change jobs, lose jobs, start a business or whatever else may come. Americans need more choices and the market power to buy the health coverage that works best for them and their families and, in turn, to make insurance companies compete for their business.
Such a system could be implemented today by creating state or regional insurance exchanges that pool individuals and small groups to pay the same lower prices charged to larger employers; that certify that all insurance benefit packages meet minimum consumer protection standards; that manage the enrollment process; that collect premiums; and that require insurance companies to issue and renew coverage for anyone who applies, protecting the insurers by paying them a risk-adjusted premium that pays them more when they enroll sicker, more costly, patients.
Fundamentally, this means that insurance companies would have to change their business model to compete on the basis of quality, price and benefits, rather than by “cherry picking” the healthiest people to cover. It means spending less money on administrative costs and more money on keeping patients healthy. And it means letting everyone keep the health insurance they have if that’s what they want, but giving all employers and employees more choices for their health care.
In the coming year, there will be no shortage of suggestions for fixing the nation’s health-care system. But what Americans and the president-elect need to ask is whether the health-care system that was founded in the 1940s is the best health-care system for the 21st century. We believe that Americans deserve better.
Dr. Emanuel, an oncologist and chairman of the department of bioethics at the National Institutes of Health, is author of “Healthcare, Guaranteed” (Public Affairs, 2008). Mr. Wyden, a Democrat, is a U.S. senator from Oregon and sponsor of The Healthy Americans Act.
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