One of President Obama’s most frequent health reform mantras is, “If you like your health care plan, you can keep your health care plan.” This is consistent with his belief that we “must build on the current employer-based system” that insures 158 million people who comprise the vast bulk of all privately insured Americans. There is just one problem with this approach: employer-provided group insurance is dying and cannot be saved. Despite its longstanding dominance, group insurance, whether self-funded or provided by outside insurers, suffers from major flaws that are increasingly exposing its fundamental unsuitability as an even partial solution for effective health care reform. This is true for all employers, no matter what size. Here are group insurance’s more pronounced shortcomings:
1. Lack of Portability: Group insurance ties the individual to his or her job, an anachronism in an era when people change their jobs as often as their cars. And if you lose your job through layoffs or illness, you soon lose your insurance as well. If you can’t find affordable individual coverage, then welcome to the ranks of the uninsured.
2. Large Employer Bias: Group insurance is enormously biased in favor of large employers. That’s why, in 2009, 98% of firms of over 199 employees offered health benefits, while only 59% of small firms were able to. Small businesses are THE economic engine of our economy. Yet they’re saddled with excessive regulation and lack of risk-pool heft that leaves them susceptible to huge year-to-year pricing swings—mostly upward. Just a few sick employees or dependents can raise rates for an entire group to unaffordable levels.
3. Contingent-Workforce Ineligibility: The past three decades have witnessed explosive growth in temporary and part-time employment as the U.S. economy has continued its shift from manufacturing to services. Unfortunately, such contingent workers are almost never covered by group insurance, leaving them on their own to find affordable individual insurance that may also be unavailable.
4. Lack of Employee Choice: Less than half of all group insurance programs give employees even minimal choice of insurers. Instead, employers put all these key decisions into the hands of human resource executives who, however capable, aren’t allowed to take into account the individual health needs of their employees because of federal privacy regulations.
5. Moral Hazard from Unhealthy Behavior Subsidies: Employers rarely charge higher premiums to employees who smoke, abuse alcohol, or are obese—even though these and other personally controllable health risk factors account for 75% of all medical costs. Thus, they are forcing employees with healthy lifestyles to subsidize those with unhealthy ones.
6. Reverse Age Discrimination: Group insurance discriminates against young, lower-paid workers who must either subsidize their older, higher-paid colleagues or go without insurance altogether. When many rationally do the latter, they’re blamed for thinking they’re invincible.
7. Poor Accountability: Because most employees have no choice in insurers, their insurers have no direct accountability to them. This allows carriers to unilaterally delay and deny valid claims, drop providers, and hide behind impenetrable bureaucracies with relative impunity. Group insurance also drives wasteful utilization by removing individual knowledge, concern, or ability to care about medical prices.
8. Misstated Total Compensation: Group insurance mischaracterizes employer premium contributions as employer largess when they’re really just a diversion of part of employees’ total earned compensation, not an addition to it. Like squeezing a water balloon, if you increase employer contributions, you decrease worker take-home pay—a major reason for constrained middle-class income growth over the past decade. The President’s demand for greater employer contributions (or penalties) will directly result in even lower take-home pay for workers. And young employees face a Catch-22 if they drop coverage. Although they may save on payroll deductions, they entirely lose the employer contribution, thus relinquishing a significant part of their hard-earned compensation—not to mention Mr. Obama’s additional penalties for ignoring his individual mandate.
9. Administrative Inefficiency: The McKinsey Global Institute has estimated that all the separate employer insurance arrangements require $75 billion in non-value-added underwriting, marketing, sales, billing, and administrative costs that are ultimately borne by the employees and that could be better diverted to increase employee pay.
10. Innovatively Inert: Employer insurance is dominated by outside brokers and consultants, most of whom know little of fundamental health economics, but much about maximizing their own profitability. Innovations tend to be more form than substance.
11. Failure to Control Costs: Saving the worst for last, group insurance has utterly failed to control medical costs. To the contrary, it fans the flames of inflation by promoting moral hazard, by insulating employees from any knowledge or concern about price or medical necessity, and by granting a virtual blank check to medical providers to provide excessive, mediocre-quality care at ever-increasing prices. And those highly touted employer wellness programs are almost universally ineffective in lowering total medical costs.
Employer-provided group insurance is intrinsically defective and can’t be fixed. It exists as a consequence of an almost universally ignored market failure that could be corrected by relatively straightforward government regulatory reform and improved safety nets for the poor. The President’s labyrinthine scheme of health reform built on employer insurance is constructing a flawed edifice on a foundation of sand. It will only hasten the further degradation and eventual collapse of our fundamentally broken health care financing and delivery system. The tragedy is that it doesn’t need to be that way.