February 11 2014

A Good Diagnosis, But the Wrong Prescription

Carrie L. Lukas

There is no reason that Americans should depend on their employers for health insurance. We don't rely on them for car insurance or home insurance, so why health care?

Ezra Klein succinctly describes how we got to where we are, and why it makes no sense:

The problem is the employer-based health-care system. It’s never made a bit of sense for health-care benefits to be routed through employers. The system emerged in the U.S. by accident. Wage controls during World War II made it impossible for companies to attract workers by offering higher salaries. Because health benefits were exempt from high wartime taxes, companies began using them to attract talent. After the war, unions joined employers in pressuring Congress to ensure employer-based health benefits were never taxed. So the U.S. emerged with an odd system in which a dollar of untaxed employer-based health benefits was worth much more to a worker than a dollar of taxed salary. Employers became the main vehicles for insurance not because anyone thought it was a good idea, but because the tax code made it a bargain.

The result has been a disaster for employers and workers alike. In Canada, the risk pool is effectively the entire country. Two costly pregnancies have barely any effect on aggregate costs. In Medicare, the risk pool is 49 million beneficiaries. A few patients with catastrophic health problems won’t budge those numbers much. But in our employer-based health-care system, the risk pool is often a few hundred, a few thousand or a few tens of thousands of employees. A bit of bad luck can be catastrophic.

Klein focuses in this only on why this is a bad system for employers, but it's also very unfair for those Americans who don't get insurance through their employers. They have to use after-tax dollars to purchase their individual insurance and often have limited options and face high prices.

Yet Klein presumes that the only way to solve the counter-productive employment-health insurance link is to move toward a single-payer system or government-run exchanges like ObamaCare. He highlights the advantages of a single-payer system—a huge risk pool—but ignores the obvious downsides of problems with supply and demand (which can lead to huge waiting times for patients, as is so often the case in Canada) and discouraging innovation.

As Hadley Heath recently wrote, we could begin untying employment and health insurance merely by changing the tax code to level the playing field between employer-provided and individual insurance.

We should all agree that the American health care system has been far from perfect, but it's a mistake to think that the more and more government micromanaging of our health care system is the way to solve that problem.  

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