A debate rages among brokers and agents about the best way to fund employee health insurance.
One side promotes the current system: Employers retain their free choice to 1) provide group insurance, 2) pay for individual insurance, or 3) offer no insurance.
The other promotes substituting employer-paid, portable individual insurance. This view has gained wide acceptance, especially among free market health reformers.
Why employers provide insurance
There are five reasons employers provide group insurance.
1. They want their employees to have health insurance. Employers need healthy employees. Health insurance helps protect the employer's interest in getting employees back on the job as quickly as possible.
2. Many employers feel a moral obligation to provide health benefits to employees. Benefits help create a sense of family or community between employer and employees that directly affects employee morale and is critical to a business' success.
3. Employers know that when they give employees cash to purchase insurance – as higher wages or a defined contribution – they may spend it on something else. As a result, fewer employees will be insured.
4. Employers want to recruit the best possible employees. As enticements, they use employee benefits that include time off, retirement plans, and a variety of insurance benefits. Of all these benefits, surveys show that employees value health insurance the most.
5. Employers want to retain employees, and the health benefit is often a key. Employees who prefer a cash payment rather than group insurance are more likely to move from job to job, whereas those who participate in group insurance are more likely to stay with an employer.
Those who advocate replacing group insurance with portable employer-paid coverage often view the issue from the employee's perspective. They see group insurance as "golden handcuffs" that restrict individual freedom, denying their right to work for a different employer. Employers, however, also have rights. They see employee retention as a vital element of a profitable business. Group health insurance is one way to build and maintain a quality workforce, as a key tool to reduce turnover. Successful employers know that high employee turnover is like a cancer that will eventually eat away at and destroy their business.
Should employers fund individual insurance?
Will all individuals who receive a cash payment in lieu of group insurance use the money to buy insurance? Of course not. Why would putting more money in a person's pocket incent them to buy health insurance, even if it is tax deductible? Without mandating that everyone must own health insurance, these individuals will just as likely spend their "found" money on something else.
Individual health insurance premiums are age-based. Younger people have fewer claims than older people do. This is why a young person pays $150 a month, and an older person pays $450 a month for the same insurance plan. Under a health plan based on individual coverage, will employers discriminate against younger employees by paying them one-third as much as an older employee? No. The employer will pay the same defined contribution to all employees, regardless of age or need. As a result, the young person will receive more money than he or she needs, and the older person will receive less than he or she needs. This will result in a higher uninsurance rate among older people.
To solve this "crisis," the government will mandate community rating, creating a new problem: Many more young people will drop coverage, as their premium doubles from $150 to $300 a month, or more.
Community rating, especially when combined with guarantee issue, will drive insurance premiums higher for younger people. The resulting spike in uninsurance rates will provide politicians with more incentive to move to government-mandated universal health insurance.
What if we eliminate group health insurance?
The idea of individuals being more responsible for their own health insurance is good, but doing it by dropping group insurance is fraught with unintended consequences.
Some employers will just quit paying a benefit. Some will substitute a pay increase. Others will pay a flat amount into an insurance fund. If they fund individual health insurance, they will treat single employees and those with dependents the same, and that will hurt families. The number of uninsured families will rise.
During 2007, $723 billion of the nation's health care bill was paid by private insurance, and hundreds of billions of that came from employer-provided group insurance. If group insurance is eliminated, that revenue could be lost from the health care system. The uninsured rate will soar and political leaders will respond. Government-mandated universal health insurance system will follow.
The reality is that any remaining semblance of a free market health care system will collapse without some form of employer support. Those favoring government-managed health care realize they must destroy group insurance: Incremental change toward community rating, guarantee issue, and mandated coverage are the door openers to finish this task.
Instead of eliminating group insurance, there needs to be a movement toward increased consumer choice and control of health purchases, and employer-provided group insurance should play a pivotal role in this process.
The debate should not be about who pays the premium (individuals or employers), but about what the premium purchases – plan design. Employers may purchase consumer-directed, group insurance health plans, or, if they choose, help fund individual health plans. The wise health insurance agent will do all he or she can to point employers toward consumer-directed insurance plans. – E.B.A.
Greg Dattilo and Dave Racer are co-authors of Your Health Matters: What you need to know about US health care (Alethos Press LLC, 2006) and FACTS: Not Fiction--What really ails US health care (Alethos Press LLC, 2007). Contact them at email@example.com. See also http://www.freemarkethealthcare.com .