Problem: Under current employee benefits law, employers have few opportunities to institute sound cost-containment practices without substantial income tax penalties, and employees have few opportunities to purchase less costly health insurance or policies tailored to individual and family needs.

Solution: Health insurance benefits should be personal and portable, with each employee free to choose an individual policy which would remain with the employee in case of a job change. Health insurance benefits should be included in the gross wages of employees who would be entitled to tax credits for premiums on their personal tax returns – so that employees reap the direct benefits of prudent choices and bear the direct costs of wasteful choices.

Discussion: Suppose a small firm is considering purchasing an individual health insurance policy for each employee in order to take advantage of the favorable treatment of health insurance under the tax law. As Table 5 shows, this firm will immediately confront four problems. The first problem is that the cost of the policy will vary depending on the age of the employee. (A 60-year-old male, for example, is about three times more expensive to insure than a 25-year-old male.) The obvious solution is to pay the premiums for the policies and reduce each worker's salary by the premium amount. The second problem is that not all employees may want health insurance (e.g., some may be covered by another policy). The obvious solution is to give health insurance only to those employees who want it, reducing the salary of each by the amount of the premium. The third problem is that some employees may have preexisting illnesses, and the insurer may want to insert exclusions and riders into their policies. The obvious solution is to get each employee the best possible deal. The fourth problem is that employees may have different preferences about the content of their policies. Some may want to trade off a higher deductible for a lower premium. Others may want coverage for different types of illnesses and medical services (e.g., infertility coverage). The obvious answer is to let each employee choose a policy best suited to the employee's needs and preferences.

TABLE 5

SOLVING HEALTH INSURANCE PROBLEMS FOR EMPLOYERS AND EMPLOYEES

Problem

Solution

Employees have different prefer­ences about health insurance cover­age (deductibles, types of services covered, etc.).

Allow each employee to choose a policy best suited to individual and family needs.

Costs differ by age, sex, type of job and other employee characteristics.

Reduce each employee's gross salary by the amount of that employee's premium.

Not all employees want or need em­ployer-provided coverage.

Give health insurance only to employ­ees who want it.

Some employees have pre-existing illnesses.

Negotiate the best coverage possible for each individual employee.


NOTE: Each of these solutions requires changes in the tax law and in employee benefits law in order to avoid costly tax penalties.


Despite the fact that these solutions seem obvious and despite the fact that every single employee may gain from them, they are generally forbidden under federal law. In general, the tax law forbids employees from choosing between wages and health insurance and insists that all employees be offered the same coverage on the same terms.

The result is that the employer must turn to a more expensive group policy with a package of benefits that no single employee may want. To make matters worse, the employer is forced to adopt a health care plan in which benefits are individualized, but costs are collectivized. Although large employers have a few more options, they too are forced into a system which has two devastating defects.

First, under the current system there is no direct relationship between health insurance premium costs and individual employee wages. In many cases employees do not know what the premiums are. In those cases where they are made aware (e.g., when employees are asked to pay part of the premium), each employee is charged the same premium – regardless of age, sex, place of work, type of work or any other factor that affects real premium costs. The upshot is that the individual employee sees no relationship between the cost of employer-provided health insurance and personal take-home pay. Small wonder that employees of large companies demand lavish health care benefits.

Second, there is no relationship between wasteful, imprudent health care purchases and salary under conventional employer health plans. Under most policies, it is as though the employee has a company credit card to take to the hospital equivalent of a shopping mail. The employee will find many interesting things to buy, all chargeable to the employer. Under this system, employees have no personal incentives to be careful, prudent buyers of health care.

In the face of constraints imposed by federal policy, employers are trying to hold down health care costs by taking actions that have very negative social consequences. Unable to adopt a sensible approach to employee health insurance, many large firms are asking employees to pay (with after-tax dollars) a larger share of the premium. Often employers will pay most of the premium for the employee, but ask employees to pay a much larger share for their dependents. [26] These practices result in some employees' opting not to buy into an employer's group health insurance plan. More frequently, employees choose coverage for themselves but drop coverage for their dependents. Indeed, three million people who lack health insurance are dependents of employees who are themselves insured. [27]

Because employee benefits law prevents smaller firms from adopting a sensible approach to employee health insurance, many are responding to rising health insurance premiums by canceling their group policy altogether. Often, employers will give bonuses or raises in an attempt to pass on to employees the gain from eliminating the health insurance benefit. Employees are then encouraged to purchase individual health insurance policies (with after-tax dollars) on their own. Many, of course, do not.

One of the great ironies of employee benefits law is that, although it was designed to encourage the purchase of health insurance, its more perverse provisions are increasing the number of people without health insurance. Because employers cannot individualize health insurance benefits, many are turning to other practices that are increasing the number of uninsured people.

To remedy these problems we recommend that: (1) health insurance benefits be made personal and portable; (2) health insurance premiums be included in the gross wage of employees with tax credits for those premiums allowed on individual tax returns; (3) individual employees be given the opportunity to choose between lower wages and more health insurance coverage (and vice versa); and (4) individual employees be given freedom of choice among all health insurance policies sold in the market place. These recommendations would have several advantages: [28]

  1. Rising health care costs would no longer be a problem for employers – health insurance premiums would be a direct substitute for wages.

  2. Employees would have opportunities to choose lower-cost policies and higher take-home pay.

  3. Employees would have the opportunity to select policies tailored to their individual and family needs.

  4. Employees would be able to retain the tax advantages of the current system, but avoid the waste inherent in a system in which benefits are collectivized.

  5. Employees would be able to continue coverage at actuarially fair prices if they quit work or switched jobs.

When there is a direct link between salary and health 'Insurance premiums, employees will be more prudent about the policy they choose. For example, those who want policies with no deductibles and all the bells and whistles will pay the full premium cost in the form of a salary reduction. Faced with this choice, employees are more likely to choose high-deductible, no-frills catastrophic coverage.