President Obama has largely kept his promise to make health care reform a top priority of his administration, but the current debate in Washington has lost sight of the forest because of all the trees.
For obvious political reasons, the administration is trying to graft reform onto the back of our current health care system. For example, companies that offer health insurance to employees will still be able to do so. But a public insurance plan will be layered on top of that to compete with employer-sponsored private health insurance.
To pay for it all, Congress is proposing a dizzying array of tax credits, employer mandates, and payroll taxes. These are the trees on which much of the debate has focused. But what’s really needed is a fresh approach that addresses the forest, namely our current system of employer-provided health insurance.
The system is an anomaly that was born during the dark days of World War II. At the time, the government froze wages to control the cost of goods and services needed to prosecute the war. To compensate for the lack of pay raises, companies were allowed to offer “fringe benefits,” such as health insurance.
As an incentive to businesses, the government made health insurance costs tax deductible. The system worked well during the war and its immediate aftermath, because tax-deductible health insurance was cheaper than providing pay raises, which are taxable. The write-off now amounts to about $600 billion annually.
That world, however, no longer exists. Today, workers change jobs frequently and a growing number are employed as independent contractors. In addition, employer-sponsored health insurance has never provided the necessary check on costs, because the ultimate consumer of health services -– the employee -– does not pay the bill.
The system has led to the twin bugaboos of today’s health care crisis: accessibility and skyrocketing costs.
The current system also creates an unlevel playing field for small businesses that can’t afford to offer health insurance; they are automatically disadvantaged when it comes to hiring and retaining employees.
The added cost of employer-provided insurance also disadvantages U.S. companies in the global marketplace by raising the unit-cost of production. Free of that burden, foreign companies can manufacture products for less. The failed U.S. auto industry is the most glaring example of that dynamic at work.
Meanwhile, workers who lose jobs through no fault of their own are doubly punished because they also lose their health insurance.
The Obama administration and Democratic plans address the issue of portability by proposing to create a public health plan that will compete with private insurers. Proponents also argue that a public plan will provide a check on costs by keeping private insurers “honest.”
But the key to controlling costs really lies in the pooling of risk. Right now, the health insurance market is made up of a patchwork of pools that are typically based on an employer’s workforce: The more employees, the larger the pool, giving large corporations more negotiating power to lower costs.
Under the Employee Retirement Income Security Act (ERISA), which covers a wide range of employee benefit plans, employers also have the ability to bypass private insurers and self-insure their employees, which lowers costs even more.
Small businesses lose those advantages because they have far fewer employees in their pool, which means less negotiating power, higher administrative costs per employee, and devastating premium increases when one or more workers becomes seriously ill. Typically, that’s why smaller companies pay more for insurance, and why individuals pay the most of all.
Not surprisingly, the insurance industry has always opposed reform efforts that allow small companies to band together through trade associations and other organizations to create larger pools. That’s because the current hodge-podge system tips pricing power in the industry’s favor.
The net result is ever-rising costs, at often two or three times the rate of inflation. The only recourse for small companies is to drop their insurance, which a growing number of businesses are being forced to do.
The obvious solution is to create one large national pool and require everyone to belong, which would spread risk over the greatest number of people. That would lower costs right off the bat by leveling the playing field on pricing power.
The Obama administration and Democrats in Congress have taken a half-step in that direction by setting up a so-called insurance exchange. None of the plans participating in the exchange would be allowed to deny coverage because of pre-existing conditions. And one of the options would be the public plan. But participants will be limited, so it’s hard to see how this will improve the current system or control costs.
Insurance has also traditionally been regulated at the state level. The net result is a 50-state crazy quilt of rules and regulations that drive up administrative costs for insurers. For various reasons, states are unwilling to give up this authority. But without uniformity in health plans across state lines, insurance will continue to be expensive and unwieldy.
Real reform would take employers out of the health insurance equation. Individuals would buy insurance like anything else, through a market based on a national pool that prohibits discrimination based on age or pre-existing conditions.
The government’s role should be limited to managing the pool and mandating essential services. The $600 billion it gains by eliminating the employer health insurance tax deduction could be used to help subsidize the cost of insurance for low-wage workers and those unable to pay at all.
There’s no question that a strong national interest lies in providing the best possible health care for everyone. Therefore, government has a rightful role to play. But the question to ask is whether the current reform effort will achieve that goal. Right now, the answer seems to be no.