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D. Brad Wright Headshot

The Paradox of Employer Based Health Insurance

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The President's Health Care Summit was yesterday, but I'm breaking from the blogosphere and writing about something else. Well, I am writing about the summit, but you'll have to visit my blog to read that, and you ought to sign up for the feed anyway.

A solid majority of Americans receive their health care through their or their spouse's employer, and for the most part, people are pretty happy with that setup. I'll put aside for a moment that most people don't know whether or not they are right to be happy about it--they typically don't know how generous their coverage is or how much it really costs--and I'll focus instead on the origin of the employer-based system and the paradox that it presents to those who strongly support the status quo.

Believe it or not, we didn't always have employer-based health insurance in this country. As a matter of fact, it's a relatively new invention. It began back during World War II, when the government instituted wage freezes because of the limited supply of available workers, but chose to exclude the provision of benefits from these freezes--and made them tax-free. Competition, like water, seeks its own level, and employers began to use health insurance benefits to attract workers, leading to the system we know today. You can read a succinct account of this here. You can also read Paul Starr's The Social Transformation of American Medicine, but it will take you much longer to get through.

Unintended consequences are a given in the policy world, and our accidental employer-based system is no different. Besides, there's evidence that group plans are a better deal than individual plans, because of the more efficient pooling of risk that they entail. Of course, that same principle would favor a universal single-payer plan over the patchwork we have now, but that's a different post.

There's an inherent paradox that those who support the employer-based system most strongly must subscribe to given its tax-free nature. Most opponents of reform, you see, would agree with these three statements: "We need less government taxation." "I don't want the government providing benefits to people." "People in this country who work hard deserve to get ahead and people who are lazy shouldn't get handouts."

The problem is that, while the tax-exemption of employer-based health insurance certainly aligns with the first and third statements, it flies in the face of the second one. By making health insurance benefits tax-free, the government is effectively subsidizing the coverage of everyone with job-based insurance, including the wealthy. In fact, because they are in a higher tax bracket, the wealthier people catch a bigger break from Uncle Sam.

So champions of the status quo clearly favor less taxation more than they oppose the idea of government giving handouts to people--at least so long as they're the ones getting the handouts. Otherwise, why not move to making employer-based insurance fully taxable? That would realign incentives "in a quick hurry" to use a good Southern phrase. Some people have raised this idea, but you'll notice it has very little traction. The closest we've come is the targeted tax on "Cadillac plans."

If we can't afford to subsidize the purchase of coverage for those who have none, why should we continue subsidizing the purchase of coverage for those who have something already? People should adhere to their principles more stringently, if you ask me. If you don't believe in government handouts, stop accepting them for yourself, and start paying taxes on all of your compensation. After all, you've earned it.

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