Strategies for Health Insurance and Benefit Design - Employer-Sponsored Insurance

In this segment, I want to talk about the stakeholder players and what I'm going to call the health insurance game of hot potato. You may remember the game of hot potato when you were a kid. A bunch of your friends are in a circle and you're tossing a ball back and forth. That's the hot potato and the object of the game is to hold on to the ball for as little time as possible and pass it off to someone else. In health insurance, the hot potato is financial risk and the people who are playing are the various stakeholders in the health insurance game. That includes the patient, maybe the employer, the insurance company, the provider. Each one of those stakeholders wants to get rid of the hot potato and wants to hand it off to someone else. Now, before I go into detail about who these stakeholders are in the hot potato game, let's think about the situation in which there's no health insurance at all. That's the situation in which health care is entirely funded through out-of-pocket payments. If I get sick, I go to the doctor or the hospital. I pay a fee directly. There's no insurance company in the middle. There isn't that much of that. That, of course, is the situation in which people don't have insurance at all or it's reflected in deductibles and co-payments, but in general, that's a minor part of how health care is paid for. What about insurance systems? Well, if it's private insurance, I might pay a premium to a health plan and then the health plan uses those collected premiums to reimburse the providers, the doctors and the hospitals when health care needs to be provided, right? So, that's why health plans are considered third-party players, right? They're third parties compared to the two parties, the two principal parties, the patients and the providers who would have been there without health insurance. That's why health plans are third parties. What about employment-based insurance? Well, in that case, the premium to the health plan is paid for in part by the employer and in part by the employee. I'm going to come back to that in a few minutes and then the health plan uses those premiums and the pool of money to reimburse the doctors and the hospitals who represent the provider organizations. Seems simple, right? Well, not really, right? Instead of two parties, the doctor and the patient, we now have four parties. We've added the insurer and we've added the employer and each party has its own interest. Now, it's hard to make improvements in the overall system of health care without understanding these relationships, without understanding the hot potato of financial risk that exists among these stakeholders. Now, you may be asking, well, why was health insurance tied to employment in the first place, right? Other countries, many of them, most industrial countries have government-sponsored health insurance. We don't have that to the same degree, but even so, why do we tie our health insurance to employment? Why isn't it just private insurance that we buy? Well, the story is that back in 1942, during World War II, wage and price controls were implemented given the labor shortages that existed because of the servicemen and women who were deployed overseas. Companies were prohibited from increasing their wages as a way to compete for workers. So, what did they do? They began to compete with benefits rather than wages and one of the benefits that they began to compete with was by offering health insurance as one of the ways you were compensated for your labor services. And then, a year later, in 1943, the IRS did something on top of that. They decided that health insurance benefits would be exempt from taxation, which is largely the situation we have now. But in 1943, the top tax rate was 88 percent, meaning that the windfall that came from that IRS decision was substantial. You could avoid, at least in the top tax bracket, 88 percent of the tax on that particular form of compensation, an extremely favorable policy for employers and employees. World War II is over and yet both of these principles stuck. Companies still offer health insurance as a form of compensation to their employees and the extremely favorable tax policy persists. Now, one of the consequences of this, the consequences of employment-based health insurance, are a series of misconceptions that get repeated over and over. The first one is the view, and many of you may have this view, that my employer pays some and I pay some. My employer pays a share of my health insurance cost and I pay a share of my health insurance cost. Wrong. You, as the employee, pay it all. Your employer may seem generous, but the money put into your health insurance is money the employer would otherwise have given you in wages. If health care were less expensive, insurance costs would be lower and you would take home more money. Second misconception, and it's related to the first. This is from the employer's side. The employer's saying, employee health care costs are killing me. Not true, if you believe the previous slide. In the long run, employers pay nothing. The employees are effectively paying it all. In fact, the tax advantages of employer-sponsored health insurance make it less expensive to provide value to your employees through that benefit than through wages. However, the famous 20th century economist John Maynard Keynes is famous for saying, the long run is a misleading guide to current affairs. In the long run, we are all dead. In the short run, the health care costs of your employees will affect your bottom line, and that's why employers have the misperception that employee health care costs are killing them. So the third misconception is related to the first two. That is that health care costs are harming U.S. competitiveness. Well, that can't really be true if you believe the previous two slides, right? These are born by employees. These are just the wage costs of producing goods and services. Now, it is true that inefficiencies can be created to the extent that people choose careers or stay in jobs to maintain the health insurance coverage that came with that job. That's the so-called job lock phenomenon. So protections against job lock can reduce economic inefficiencies, but it isn't the principle in general of employment-based health insurance that is harming U.S. competitiveness, and it isn't the principle that high health care costs are harming U.S. health competitiveness. They are depressing the wages, the effective wages that employees receive, and that can be seen in this particular slide. Over time, the compensation and the overall compensation as a percentage of GDP for workers has been relatively stable, right? In 1960, for example, about 56.3 percent of the GDP went to the compensation of workers, but as you can see, over time, more and more of that compensation has come in the form of private group health insurance or other fringe benefits and payroll taxes, effectively depressing the amount of compensation that comes as cash in your paycheck. So it looks like your compensation is going down, but in fact, your overall compensation has been staying the same. It's just that more and more of it has been taken up by health insurance costs. Put another way, the depression that we're seeing in wages is a direct result of the high cost of health care in this country, and it's being revealed in the high cost of health insurance premiums that are tethered to employee wages in the form of overall compensation.