One Divorce that Would Be Worth It

By Donald J. Sutherland
 

As inevitable as the rise and fall of the tides or the passing of the seasons, year after year, the veritable "army" of Americans who lack health insurance coverage gains the attention of the news media and policymakers alike. Yet, as much attention as this issue attracts, its underlying cause receives little scrutiny. The inherent defect at the heart of the existing health care system is that employment is the foundation of health coverage.

Today, 161 million non-elderly Americans rely on employment-based health insurance to provide for their healthcare needs¾ 67% of workers under the age of 65 rely on employer-provided health coverage. Despite the many people who depend on it for their coverage, this system is inherently flawed.

Employer-based healthcare can never come close to ensuring that all persons or families have the opportunity to obtain coverage. At best, it can cover the employed and members of their households, leaving out the unemployed who, despite the continuing economic boom, still number some 6 million persons. Granted, some of the unemployed maintain coverage through their spouses, but many do not.

Such a system is particularly vulnerable to the business cycle. In the most recent recession in the early 1990s, approximately two million workers lost health coverage as a result of the slowdown. Needless to say, health care needs do not conveniently disappear during periods of economic weakness.

In addition, when it comes to employer-based coverage, all jobs and all businesses are not created equal. Currently, nearly three-quarters of all private companies offering health coverage do so only for employees who work 32 or more hours per week, leaving many part-time workers with no options for work-based coverage. Temporary workers and those in jobs with high rates of turnover and seasonality are also largely excluded from an employer-based system. This situation is particularly troubling, because for roughly two decades, the number of temporary workers has been increasing by about 10% per year; it is now at around 2.5 million. In addition, half of all uninsured workers come from the retail and service industries.

There is also a strong correlation between the size of a company and whether it offers health coverage to its employees. Currently, 96% of firms having 100 or more employees offer coverage, while 44% of companies having fewer than 100 workers offer such coverage. At the same time, these large firms employ 57% of all employees, while their smaller counterparts account for 43%. The record is even worse for the smallest companies, which are often the fastest growing firms. Of companies having fewer than ten employees, just 33% offer coverage; yet, together these businesses employ 16% of all workers.

Aside from these coverage-related challenges, employer-based health care is not necessarily consumer-friendly. In such a system, the interests of companies (e.g., in keeping health care costs relatively low) come into conflict with the personal needs and desires of those being offered coverage. For example, a family might desire more expensive comprehensive coverage for its young children than an employer might offer. The fact that patient interests play a reduced role in an employer-based system tends to distort market forces that would ordinarily lead to more appropriate coverage at potentially more affordable prices.

Given the limitations of this system, it is time that policymakers seriously consider decoupling employment and health coverage. This could be done by simply converting the present healthcare tax exclusion for employers into an individual tax credit that goes directly to individuals and families and not employers. Such reform would be highly controversial, and thus difficult to enact.

A second idea would be to expand the tax exclusion to include employees as well as employers (so that whoever purchases health coverage would enjoy the same tax treatment) while allowing health policies to follow individuals wherever they work. Let us assume that an employee receives coverage from United Healthcare purchased for that employee by IBM, with IBM paying $160/month on a $200/month policy. The employee moves to Cypress Semiconductors and is offered $120/month health coverage from his new employer. Under this scenario, he could still retain his existing United Healthcare policy simply by covering the amount not funded by his new employer. At the same time, the full cost of the policy would be deductible, in part by the employer and in part by the individual. Instead of COBRA and its highly limited portability, there would be true portability.

Finally, current Federal expenditures on healthcare could be converted into a tax credit that could be used to help finance the purchase of private health coverage and/or fund a Medical Savings Account.

This new approach would ensure that all persons, even those with low incomes, would have maximum opportunity to obtain the health coverage they need.

Donald Sutherland is a research fellow at the Institute for SocioEconomic Studies.