The realities of health insurance

Government subsidizes individual policies, but gives employer plans even more

The traditional Republican view is that health insurance ought to be provided by the private market and that only in the private market are individuals free to choose whether and what type of insurance they ought to purchase. There is no reason to believe that one size fits all. Individuals should determine for themselves how much they are willing to pay to shift some or all of the financial risk of illness to an insurance pool. In turn, competition for policyholders gives insurance companies all the incentive needed to control costs and provide services that make their policies attractive to policyholders.

In this view, if some people are viewed as needing financial assistance to pay for health insurance, they surely need assistance to purchase a wide array of other goods and services as well. It is not proper to tie assistance to any particular type of expenditure. All people, regardless of their circumstances, ought to have the right to decide how best to use any resources they have, whether those resources are earned entirely by their own labor, or received, in part, by transfers from the government. To treat people differently based on the source of their income is to deny to some rights that are afforded to others.

From this Republican perspective, individual rights are best protected by a competitive marketplace. The question of how much help those of lesser economic circumstances ought to receive from those who are more fortunate ought to be addressed independently from any consideration of access to particular goods and services. It is this belief in the efficacy of free markets as a protector of individual choice and an efficient system for controlling costs that has led Republicans to oppose not only the Affordable Care Act, aka Obamacare, but also Medicare and Medicaid. It is this belief that shapes their vision of a replacement for the ACA.

Sounds good. But how has health insurance really worked in America?

Prior to the passage of Medicare and Medicaid, few people without employersponsored health insurance had health insurance at all. And employer-sponsored insurance itself was fostered by the government — by wage and price controls during World War II and by in come taxpolicy.

Wartime wage controls did not apply to employer paid fringe benefits. So firms competed for employees by offering to pay for their health insurance, with risk ratings based on their entire workforce. This meant that no employees were denied coverage or charged an additional premium if they had a pre-existing condition. In addition, employer-paid fringe benefits were, and are, not subject to the personal incometax.

Individuals who sought insurance on their own did not have either of these advantages. Not only would they have to pay for policies with after-tax dollars, they also could be denied coverage for pre-existing conditions based on an assessment of their individual risk of illness or injury.

Insurance companies in a competitive market could not do otherwise. They would be subject to adverse selection, getting only those who were most expensive to insure, if they did not rate each individual for risk and deny coverage to those with pre-existing conditions.

So it is not surprising that, after World War II, employer-sponsored group insurance became the dominant form of health insurance. By 1970, 78 percent of Americans under the age of 65 were covered by private health plans, but 87 percent of those people had their coverage paid for by employers. Most people who had no employer-paid insurance had no private insurance. The same was true prior to passage of the Affordable Care Act.

The private market, supported by substantial tax advantages, has worked well for those with access to employersponsored health insurance. But it has never worked well for those who cannot belong to those plans. Furthermore, changes in labor-market conditions have reduced the percentage of the population under the age of 65 who are insured through employers. The percentage of firms offering insurance has declined, and part-time workers, who are often not covered by such plans, have become a larger fraction of the labor force. Firms also have been substituting uncovered contract workers for full-time employees.

The result is that, from 1984 to 2010, before the passage of the ACA, the percentage of the population under 65 covered by employer-sponsored plans declined by 18 percent. And that’s why the percentage of people who had to turn to the market for individual policies based on individual risk ratings rose significantly as well.

The ACA was designed to provide individuals who could not secure health insurance through employers the same types of benefits available to those who could. It allows individuals to buy insurance on the market that is not risk-rated by individual. This means they cannot be excluded if they have a pre-existing condition. The vast majority also can receive insurance at a subsidized price.

The subsidies are substantial, but they cost the federal government only a small fraction of the tax revenue lost via the income-tax exemption for employer-paid insurance. In 2015, the tax exemption cost the federal government $201.5 billion. By contrast, the Congressional Budget Office estimated mandatory spending on health insurance subsidies under the ACA at $36 billion in 2015. Without health insurance, many people are one- serious illness away from bankruptcy. Preserving health insurance benefits for those who otherwise could not afford them is a signature feature of the Affordable Care Act. Since its passage, personal bankruptcy filings have declined by 50 percent. The bottom line is this: The federal government has and will continue to play a large role in developing and sustaining the private market for health insurance. Employer-sponsored plans — the predominant form of private health insurance in the United States — gives those who are enrolled in them the benefits of guaranteed insurability, no individual risk rating and substantial tax subsidies. Extending these benefits to those who purchase individual policies on governmentprivate-market exchanges has been a critical accomplishment of the Affordable Care Act and a key reason that some 20 million more Americans have been able to obtain health insurance since it was passed in 2010. While there are likely to be, and should be, some changes made to the ACA, it is certain that the federal government will continue to play a constructive role in the private market for health insurance.