Employer-sponsored health insurance should be fired

Sen. Bernie Sanders, who is seeking the Democratic nomination for president, has made a career out of lambasting America’s employer-sponsored health insurance system.

It causes workers to “worry about losing health” benefits if they’re laid off, he recently said.

It forces employees to stay in jobs they “really hate” solely to maintain coverage. And it compels small business owners to spend an “inordinate amount of time, energy, and resources” on insurance-related matters rather than focus on growing their firms.

Sanders and I don’t agree on much. But on this front, he’s absolutely right. We should decouple health insurance from employment. However, his preferred method of doing so — outlawing private insurance and dumping everyone into a one-size-fits-all government-run plan — isn’t the solution. As patients in Canada and the United Kingdom know all too well, long waits for care, rationing, and shortages of doctors are endemic to single-payer systems.

The Trump administration has a better idea. It’s taken a step toward giving individuals control over their health insurance by issuing a new rule that will expand health reimbursement arrangements. These accounts are funded by employers but allow people to shop for their own insurance with tax-free dollars. Empowering consumers, rather than employers, to make decisions about their health coverage would do wonders to reduce costs and boost the quality of care.

According to the U.S. Census, about 180 million Americans get health benefits through their employers. The vast majority have never known an America without employer-sponsored insurance, which dates back to World War II. Government officials feared a wartime labor shortage would prompt companies to offer everhigher pay packages to attract scarce workers, and thus fuel inflation. So President Franklin Roosevelt froze wages.

He couldn’t freeze the law of supply and demand. Companies skirted the wage caps by offering health benefits, which the IRS exempted from taxation in 1943, to woo potential employees.

Over the ensuing decades, firms offered ever-more generous insurance plans. Untaxed health benefits are more attractive than taxed wages to employer and employee alike.

The employer-sponsored status quo has created a host of problems. For starters, if workers leave their jobs, they lose their insurance. So people are generally less willing to pursue new opportunities or launch new firms. Indeed, uninsured men are more than twice as likely to start a business as men with employer-sponsored coverage, according to a RAND Corporation study.

The tax exemption also encourages bloat and waste. Consumers are generally unaware of the total cost of their health plans. After all, large employers shoulder roughly 70 percent of the cost.

Because their employers are paying the bill, workers and their families don’t have much incentive to shop around. There’s little penalty for consuming expensive or unnecessary services. So people consume more care than they would if they had to pay for it themselves.

Further, doctors and hospitals know patients aren’t sensitive to prices. That gives them leeway to charge more than they could in a more functional, competitive market. Employers and insurers are often reluctant to question their prices, lest they be perceived as limiting access to care.

Expanding health reimbursement arrangements could change all that. HRAs allow employers to support their employees’ health care without assuming responsibility for managing it. Individuals, meanwhile, get to choose plans that meet their needs and budget, not their employers’. Experts predict the Trump administration’s HRA rule will encourage 800,000 employers to fund accounts for more than 11 million individuals.

Insurers will respond to that surge of new customers by offering a variety of plans, each with different cost-sharing structures and benefit designs. All that competition is likely to lower overall costs. On average, adding just one additional insurer to a health exchange reduces premiums by 4.5 percent on average.

Americans buy auto insurance and homeowner’s policies on their own. There’s no reason they can’t do the same for health insurance.

The author is President, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute.