• Threats to Employer-Sponsored Insurance

    In today’s Wall Street Journal, John Goodman runs down the various pathways by which the new health reform law will erode employer-sponsored insurance. We’ve seen much of this before, so I won’t rehash all the issues (recall my recent employer-dumping post, one of many).

    Goodman does raise one issue I’ve considered but haven’t written about yet.

    Take a hotel with maids, waitresses, busboys and custodians all earning $10 or $15 an hour. These employees can qualify for completely free Medicaid coverage or highly subsidized insurance in the exchange.So the ideal arrangement is for the hotel to fire the lower-paid employees—simply cutting their plans is not an option since federal law requires nondiscrimination in offering health benefits—and contract for their labor from firms that employ them but pay fines instead of providing health insurance. The hotel could then provide health insurance for all the remaining, higher-paid employees.

    Ultimately, we could see a complete restructuring of American industry, with firms dissolving and emerging based on government subsidies.

    I think this will happen. In fact, I think there will be an erosion of employer-sponsored insurance. Moreover, I think that’s a main element of the ACA. The Cadillac tax is the principal mechanism that will drive it. And I think this is a good thing, in general. Tying health insurance to employment with huge tax subsidies contributes to many of the problems in health care financing and the labor market. It provides incentives for overuse of medical care and reduces labor mobility. Once another good source of insurance exists, it would be best if we moved away from the employer-based system and targeted government subsidies to those that need it.

    But we want this to happen gradually, which I think is likely. So, I’m not bothered by any of this, aside from the issue of costs, which is a substantial and not fully resolved one.

    Goodman concludes by describing his preferred reform, one that would invite a rapid erosion of employer-sponsored insurance.

    A much better approach … would [be to] replace the current subsidies with a system that gives every family, regardless of income, the same number of dollars of tax relief for health insurance.

    Under this approach, all insurance would be subsidized the same way, regardless of where it is purchased. All taxpayers would be subsidized the same way, regardless of how they obtain their insurance. Unlike the president’s scheme, it makes sense both in terms of equity and economics.

    Fair enough. But there’s this one problem. Goodman’s idea (same as McCain’s) didn’t have the votes. It didn’t have–like it or not–the required support of special interests. One reason is that it would do little to reduce the uninsurance problem precisely because of its narrow notion of “equity.” Giving equal dollars to all individuals would not provide sufficient incentive or support for all individuals to obtain coverage. Go sell that to the hospital association and insurance industry. Good luck.

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    • Austin,

      It is hard to believe that one intention behind the ACA is to reduce the reliance on employer-sponsored health insurance given that most democrats appeared to be opposed to John McCain’s tax-credit policy for that reason. Was that just smoke and mirrors because they were angling for an even greater role for government?

      Rex

    • @Rex – That intention was not articulated. But it is so obvious that it is an effect I cannot believe the Administration and key congressional leaders were not aware of it.

      But it would have been politically dangerous to the whole enterprise to call attention to it, so it is implicit and will happen gradually. The bulk of it is even outside the 10-year CBO projection.

      I’ll have much more about this to say in the coming weeks, months, years.

    • Separating health care funding from employment was a key goal in any health reform I wanted. I have long worried about the second order effects of having people bound in place because of health insurance. Mandel writes a lot about the lack of innovation in our economy as of late. I cannot help but think health insurance issues affect the ability of people to take risks.

      Steve