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February 9, 2009


Why Tie Health Insurance to a Job?


One thing we can all agree on is that portable coverage is more secure.



The Wall Street Journal

Not many people are buying cars built 60 years ago. No one is watching TV on a set manufactured in the 1940s. Patients are not lining up to see a doctor who hasn't cracked a book since before the polio vaccine was discovered. Why, then, do millions of Americans get their health care through an employer-based system from the 1940s?


Employers didn't start offering health benefits roughly 60 years ago because they were experts in medical decisions. It was a way of circumventing the World War II wage and price controls. Barred from offering higher salaries to attract workers, employers offered health insurance instead. Aided by an IRS ruling that said workers who received health benefits did not have to pay income taxes on them, and by the fact that employers could write off the cost of the health benefits as a business related expense, this accidental arrangement became the primary way most Americans access health care.


The system worked at first, but a lot has changed in 60 years. Back then, the average soldier returning from World War II took a job with a local company where he would work for decades until he got a gold watch at a big retirement party. Today, lifetime employment is dead. By 42, the average American will change jobs 11 times.


Sixty years ago, most American companies competed only against neighboring companies for lucrative contracts. Today, most businesses are up against foreign companies that don't foot the bill for their employees' health-care costs.


Today, health-care costs are increasing at twice the rate of inflation. To stay in the black, companies are forced to raise their employees' premiums and deductibles, opt for cheaper insurance plans, or worse yet, drop health benefits altogether. Since 2000, the percentage of employers providing health insurance has declined by nearly 10%.


For too many, the employer-based system is inefficient. Each employer purchases health insurance separately. According to a recent estimate by the McKinsey Global Institute, this adds more than $75 billion in underwriting, marketing, sales, billing and other administrative costs that offer no health benefits. More than half of all American employers who offer health-care benefits don't offer their employees a choice. Consequently, most Americans don't have the option of giving their business to insurance companies that treat them well and only cover what they need. This prevents the usual market forces from holding down costs.


Workers are the ones paying for this waste. The money that employers are spending to buy health care for their employees could otherwise go to workers in the form of higher wages, empowering individuals to make their own health-care choices.


The currently available alternative to this employer-based system is even more horrifying. Individuals buying insurance don't have the same purchasing power as large businesses and end up paying much higher prices to cover administrative costs and risks. They also don't get the tax breaks that employers get for buying health insurance. In most states, insurance companies have the right to discriminate against individuals by denying coverage or charging astronomical prices to anyone with a pre-existing condition. It is no surprise that, when given the choice between the employer-based system and buying health insurance on their own, the vast majority of Americans reject the latter. (A Kaiser Health Tracking Poll this summer, for example, found that only 17% of Americans said they would prefer to buy insurance on their own.)


But this is a false choice. It assumes that the current system is the only option. Why can't Americans have the best of both worlds?


Americans need some of the benefits of the employer-based system: the security of being part of a large group, of not being denied coverage because of age and pre-existing conditions, and the convenience of having experts screen qualified plans and manage enrollment. But Americans also need portable insurance -- coverage that follows them when they change jobs, lose jobs, start a business or whatever else may come. Americans need more choices and the market power to buy the health coverage that works best for them and their families and, in turn, to make insurance companies compete for their business.


Such a system could be implemented today by creating state or regional insurance exchanges that pool individuals and small groups to pay the same lower prices charged to larger employers; that certify that all insurance benefit packages meet minimum consumer protection standards; that manage the enrollment process; that collect premiums; and that require insurance companies to issue and renew coverage for anyone who applies, protecting the insurers by paying them a risk-adjusted premium that pays them more when they enroll sicker, more costly, patients.


Fundamentally, this means that insurance companies would have to change their business model to compete on the basis of quality, price and benefits, rather than by "cherry picking" the healthiest people to cover. It means spending less money on administrative costs and more money on keeping patients healthy. And it means letting everyone keep the health insurance they have if that's what they want, but giving all employers and employees more choices for their health care.


In the coming year, there will be no shortage of suggestions for fixing the nation's health-care system. But what Americans and the president-elect need to ask is whether the health-care system that was founded in the 1940s is the best health-care system for the 21st century. We believe that Americans deserve better.


(Originally published December 10, 2008.)


Dr. Emanuel, an oncologist and chairman of the department of bioethics at the National Institutes of Health, is author of "Healthcare, Guaranteed" (Public Affairs, 2008). Mr. Wyden, a Democrat, is a U.S. senator from Oregon and sponsor of The Healthy Americans Act.