February 8, 2007

February 8, 2007 | Commentary on Health Care

We can protect employer-based health plans

Most Americans get their health insurance through employer-sponsored plans, even though the system is a bit of a relic in today's rapidly changing, highly mobile work force.

So when policymakers talk about helping more families afford private health insurance, some people naturally worry that the approach might weaken the employer-based system or drive up costs for those who need care the most.

Take President Bush's proposal to establish tax fairness for health-care coverage. Skeptics in Congress and elsewhere argue that it would mean the end of employer-sponsored coverage as we know it.

But hold on. Before demonizing the idea, why not seize the opportunity for a fresh conversation about how we can help millions of Americans without employer coverage? And why not begin with the president's idea of fixing a basic disparity in the tax code?

Today, you get an unlimited tax break on health coverage if you're fortunate enough to be insured through your job. What your employer pays -- about $11,000 a year for the average family -- is part of your compensation but entirely excluded from taxation. That's a lot of tax-free income.

But you don't get that tax break if you lack the option of employer-sponsored coverage and have to purchase coverage on your own. Instead you must use after-tax dollars to buy private insurance (that is, after you pay the rent or mortgage, gas up the car and buy groceries).

The president proposes to give every American tax relief for the cost of health insurance. It would come in the form of a $15,000 standard deduction for families ($7,500 for individuals).

Skeptics say this would inspire younger, healthier workers to leave the employer-based system and buy less expensive coverage on their own. Older, less healthy workers, they fear, would stay in job-based plans. This, the argument goes, would drive up employers' group insurance costs, prompting more and more companies to drop coverage.

It's a reasonable concern, but it's not necessarily so. Indeed, the president's proposal may stabilize and even revitalize the employer-based system.

First of all, employers don't provide health coverage because they're selfless and generous. They're competing in the labor market with overall compensation packages, not wages alone. So employers who sponsor health plans enjoy a competitive advantage they're loath to relinquish.

Second, employers are natural "pooling agents" for keeping costs down. The larger the employer (and thus the pool of employees), the more leverage in securing better deals for workers. Insurers also require many employers to meet participation rates. So employers have a strong incentive to make plans attractive to younger workers.

Third, workers' familiarity and comfort level with employer-sponsored coverage are strong bonds. Purchasing health insurance can be complicated. Some employees prefer having an experienced employer takes on most of the headaches and paperwork, just as with retirement savings.

Congress also can add protections to the Bush plan. Here are three:

  • Link the tax deduction to employer programs. Policymakers could require workers with access to employer-based coverage to use the deduction there, rather than for private insurance. This isn't ideal, but it would protect participation in employer-sponsored coverage while giving equal tax benefits to those without it.

  • Create a "blended" marketplace, with an emphasis on convenience. The employer-based system and insurance options for the individual are viewed as two competing markets, but they can be blended. The Massachusetts Connector and other state initiatives to create "health insurance exchanges" aim to preserve the convenience and other pluses of employer-sponsored coverage while stressing choice and "personal" policies that workers carry from job to job. Such advantages may well entice smaller employers -- say, the owner of a gas station or a pizza parlor -- to offer workers coverage as a way of remaining competitive.

  • Make the insurance market more stable and affordable. Troubles in the individual market must be addressed, especially if the decline of the employer-based system continues. State initiatives, such as implementing high-risk pools and risk-adjustment policies, can help those whose medical conditions make them hard to insure, as well as build stability in coverage. Federal policymakers should encourage such initiatives.

The president's goal is to give all Americans, regardless of job or job status, the same tax benefits for health care. It's a worthy goal that can be accomplished without unraveling employer-sponsored coverage.

Congress should embrace this approach precisely because it shakes up the status quo, which has left 47 million Americans without health insurance.

Nina Owcharenko is a senior analyst in the Center for Health Policy Studies at The Heritage Foundation.

About the Author

Nina Owcharenko Director, Center for Health Policy Studies and Preston A. Wells, Jr. Fellow
Center for Health Policy Studies

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