What, if any, are the benefits of tying health insurance to employment (as in the US) over other systems?

Question

Over the last 2 weeks, over 10 million US workers lost their jobs. For many of them the loss of their job means the loss of their health insurance as well.

More than 3 million Americans just lost their jobs in the middle of a global pandemic. For those whose jobs offered benefits, that also probably means they’re losing their health insurance, too — exposing yet another way in which the US health system is vulnerable amid a public health emergency.

How do 3 million newly unemployed people get health care? - Vox - 3/27/20

This seems to me like an obscene risk accumulation to tie your job and your health insurance, especially in a country where employment at will is still widespread. Why does the US stick with this system rather than switching to a system where your health insurance is independent of the employment (no matter whether organized by private or general health insurance)?

Answer 1

First, let's be clear: employers do not offer benefits like health insurance naturally. If we go back to the early stages of industrialization, employers merely offered salaries (often paltry salaries, at that). Benefits — as the name implies — came into play later; they were meant as incentives to hire and retain engineers, high-level management, or highly skilled workers, all of whom were in short supply and high demand as industries expanded and diversified. Benefits only extended to low level workers as the result of union activity, either as a direct result of collective bargaining or an indirect result where employers offered benefits to keep workers from unionizing. Benefits, from the employer's perspective, are merely a cost/benefit issue: the minimum expenditure required to prevent greater losses from employee attrition or further union activity.

The US has always been a capitalist, corporatist nation. US institutions are geared to preserve the health and well-being of corporations, not the health and well-being of employees, and in those contexts where it does not explicitly forbid unionization or collective action, it does not interfere with corporate efforts to minimize the impact of such activities.

The reason employers prefer this 'benefits' scenario is that it keeps payouts entirely within the corporate cost-accounting system. The corporation decides how much it is going to commit to employee benefits; the corporation chooses benefits plans that best fit its own profit maximization; the corporation can (as necessary) fire employees, change benefits, alter payouts, move money around, or otherwise control the way the benefits are handled. The more that benefits are shifted off to the government — through things like minimum wage guarantees, public health options, guaranteed leaves, etc — the more that money for these benefits leaves corporate control. Public health options, for instance, mean that employers cannot minimize their costs by seeking out cheap plans, cannot preclude payments for expensive procedures of ongoing medical issues, and are ultimately responsible for the health of the entire populace, not merely the limited and controllable population of current employees. The problem isn't even necessarily that their tax burden will increase (though that is a fear); the problem is that money paid into taxes for public benefits is money they lose control of, and cannot manipulate to increase their profit margin.

Of course, this leaves us in the unenviable position we are in now, in which we effectively have to bribe employers with public funds so that they don't fire employees en masse, costing people their livelihoods and health coverage in the middle of a pandemic. But that's life in a corporatist state...

Answer 2

This is a relic of the World War II--the government mandated wage controls so businesses competed on benefits. Health insurance was one of those benefits.

Until the ACA the government never made individual policies really viable--what's the point of insurance you will lose in a few years if you develop chronic problems? (I see some people don't understand what really happened. Yes, they couldn't just cancel a policy and in theory rate increases were controlled. However, the reality was that they would offer a plan for only a few years, then switch to offering something slightly different. As time passed people on the old plan would develop health problems, the cost of paying the claims went up, the premiums went up. At this point the healthy jump ship for the new plan and now you have a group that consists of only those who couldn't get insurance--with all the healthy ones out of the pool the premiums shoot up. More and more people jump ship. I personally have seen premium increases of 50% per year.)

Answer 3

You really have two separate questions here:

1. Why does the US not have socialized medicine? This has been fairly extensively discussed, on StackExchange and elsewhere, so I see no point in re-hashing those political & philosophical arguments.

2. Why do employers often offer medical insurance as a fringe benefit? This is simpler to answer: because companies could in the past (and probably still) deduct the cost of such insurance as a business expense. They could also insure all employees at group rates, which usually would be cheaper than having individuals purchase their own. This benefited both the employer and the employee: employers could deduct the cost as a business expense, while employees got the insurance without having to pay in after-tax dollars.

In addition, as pointed out in Loren Pechtel's answer, in the WWII era there were government-imposed controls on wages, but employers could get around this control by offering fringe benefits such as medical insurance. There would naturally be resistance to eliminating a fringe benefit once the wage controls were lifted, so it became customary.

You also have something of a misconception in thinking that medical insurance is irrevocably tied to employment. It's perfectly possible to obtain such insurance outside of employment. It's just that in the modern world that tends to be pretty expensive. It often had to be paid for with after tax dollars. (Tax policies have varied over the years, of course.) Then (among other factors) there has been the increasing cost of modern medical miracles. After all, when this system began (post WWII), about all medicine could do for a lot of conditions was to tell the patient to make sure his/her affairs were in order. Now many more conditions can be treated with some chance of success, but it all costs money.

Answer 4

The U.S. federal government subsidizes healthcare benefits by making them tax-exempt. Firms can therefore offer higher overall compensation by shifting part of that compensation into health benefits. As you've identified, the system where health coverage is tied to employment, caused by this distortionary subsidy, is problematic. As such, economists are overwhelmingly in favor of removing this subsidy. Note: the question in the linked survey is not about how good or bad the distortion is, but many of the comments touch on that; to wit:

• 'Subsidizing health insurance through the tax system causes people to be "over-insured," and causes the system to cater to the over-insured.'
• 'We need consumers of healthcare to be less insulated from the price system, not more. The tax credit provides insulation and subsidy!'
• 'Just to name one distortion, dental insurance is often bought when few employees would pay that much with their own money.'
• 'Lowers the price of health insurance encouraging excessive health care spending. Contributes to rising h.c.costs. Benefits higher incomes.'
• 'Tax prefs create job lock, prevent formation of a more competitive health insurance mkt, & discourage insurance coverage among young workers'
• 'Lock in is inefficient and there is no good reason to use the tax code to subsidize health insurance purchases.'
• '1. Subsidizes health spending. 2. Increases other marginal tax rates. 3. Reduces job mobility.'
• 'The is much evidence on this point and alternative proposals that could remove distortions and provide better health care incentives.'
• 'This is pretty basic, as is the fact that the distortions (econ speak for costs to society) are huge.'

Answer 5

There probably are few actual benefits, but a number of reasons for it:

• Historical (+1 to Loren's answer) and customary. "This is how we've always done it and we're not like those darn socialists elsewhere". Better the devil you know.

• Political. Keeps healthcare spending off government books. By letting employers foot up the bill and giving them tax incentives, the apparent spending by the government seems less than it really is (if you extend the notion of spending to foregoing tax income).

• Suits the US's medico-industrial complex quite well. After all, all that extra spending in inefficiencies does end up in some people's pockets and keeps other employed at jobs which could be rationalized away. That's why you can expect strong lobbying against reform.

• Lucky folk in gold-plated company plans would not be keen to see a system that they are comfortable with abolished. It doesn't even have to objectively superior to an optimal national-level plan: devil you know, they might even benefit in higher pay with a reformed system, but that's not apparent from their POV.

• Offloads coverage for low-paying jobs to the workers themselves. Small companies, or companies with subcontractors (Uber) can avoid providing benefits. These people aren't poor enough to qualify for Medicaid, so the risk is on them. Not their employers, not the government. It's a feature, not a bug, from the POV of small government advocates (never mind that lately, small government is not the term I'd associate with Federal budget deficits).

Now, onto actual negative benefits:

• A company should really be in the business of selling widgets and treating its employees well. Not looking after its employees' health care. Getting rid of the extra direct costs and management overheads and instead having companies pay generic national-level taxes, part of which were then used to take care of everyone's health would probably be quite appealing to companies, especially newer companies that are not yet making a profit. That's why I question the wisdom of the people vs corporations answers here - corporations could be allies in reforming the system, as long as they had some clarity to the financial impacts. No sane Canadian company would say - Hey give us US tax rates but saddle us with US health care costs. (They may be happier with the more laissez-faire aspects of US labor laws outside of health care however.)

• If you have # of employee thresholds after which you have to provide health coverage, expect a number of companies purposefully staying under that limit, foregoing possible gains in efficiencies/employment. This is a phenomenon seen elsewhere whenever small companies get preferential treatment.

• Tying health plans to a specific employer is extremely pernicious from an economic point of view. How many people stay in dead end jobs, not because they have great expectations for the company or like/are suited for their role, but rather just because they need to hang on to their medical plans?

As the OP remarks, the usual low-level misery of the US health care system is being starkly exposed as inadequate wrt Covid-19. What I hadn't realized until this question is how covid actually synergizes with it, by throwing people out of coverage just as it is needed.

For purely political reasons, I expect the government to have to foot the bill at some point to avoid all those personal bankruptcies of people who had to be treated. So the final bill might be hugely more than just having a coherent system to start with.

Answer 6

While of course there are disadvantages, to note some benefits of employer health insurance:

1. Compared to national public health insurance: Employer health insurance allows for competition among insurance companies and among employers to find ways of delivering more value to attract and retain customers/employees. Most Americans are happy with their current health plans.

2. Compared to private individual health insurance: Because large employers sign up broad risk pools, their plans do not require medical underwriting and they reduce the potential for adverse selection (which can make insurance more expensive or unavailable).

Answer 7

The key question is: Why is it cheaper for an employer to buy health insurance for their employees than it is for an individual to buy the same coverage for themselves? There is a fundamental reason for that:

Changing health insurance needs to be difficult.

Let's imagine that it was easy to change your health insurance. If you are healthy, you will choose the cheapest health insurance. Then, when you get sick, you'll switch to one that has better coverage. The problem with this setup is that the health insurance company with better coverage will go bankrupt because they only have the sickest customers. Meanwhile the cheap health insurance company only has healthy customers and makes lots of money. That's not how insurance is meant to work -- you need to have costs spread out over both healthy and sick people.

If people can switch insurance at will, you no longer have insurance, you just have a pay-for-service model.

Nationalized healthcare is one solution to this problem. In effect, the only way to "switch insurance" is to migrate to another country, which is impractical. (Also, many countries with nationalized healthcare prevent sick people from immigrating for precisely this reason.)

In the US, the way this is done is by tying health insurance to employment (and various restrictions such as only being able to change your plan once a year). Changing jobs is difficult, so it makes it difficult to switch to better healthcare when you get sick.

When an employer is purchasing health insurance for its employees, the insurance company assumes that the employees are a mixture of healthy and sick people. Thus the insurance company can charge the employer an "average" price for coverage.

On the other hand, when an individual is purchasing health insurance with good coverage, the insurance company assumes that this is a sick person, as a healthy person would buy a cheaper plan. Thus the insurance company charges the individual a higher price.

The health insurance market is actually quite fragile. The "benefit" of tying healthcare to employment is that it prevents the health insurance market from collapsing.

To be clear, I'm not saying that this is a good system. In fact, it really sucks. But ultimately it's a consequence of economics.

Health insurance isn't like other goods and services -- the cost to the insurance company depends on the health of the customer. (In contrast, selling someone a car is a fixed cost to the manufacturer, regardless of the customer.) At the same time, we reject the pay-for-service model (e.g., Obamacare outlawed discrimination on pre-existing conditions), so variable costs cannot be passed on to the customer. So, unless we accept socialized healthcare, that leaves us in an awkward situation and the equilibrium that has developed is to tie health insurance to employment.

Answer 8

First, health insurance is not tied to employment. Many employers sponsor health insurance plans as a benefit to attract high-quality employees. Americans can choose to buy their own health insurance or enroll in an employer-sponsored plan if it's available, which typically comes at a small discount.

Second, the US is a capitalist country, and those who support capitalism would argue that competition promotes quality and innovation. Americans can choose their employer-sponsored plan from a small selection of health insurance companies or buy it elsewhere from a different company. Each plan can have a different "network" of doctors and hospitals, and Americans are encouraged to see doctors in their network because it's less expensive than out-of-network. So from a capitalist perspective, there's competition among health insurance companies and competition among doctors and hospitals to be included in health insurance companies' networks.

Now, let's consider quality. Looking at data comparing the quality of healthcare between the US and other similar countries (https://www.healthsystemtracker.org/chart-collection/quality-u-s-healthcare-system-compare-countries/), the US does lag behind other similar countries in several metrics of quality, largely involving preventable diseases and speed of access to healthcare. Americans on average are old and overweight and smoke, relative to many similar countries, which is seen in the disease burden, and hospitalizations and complications from some medical operations (e.g., obstetric trauma). However, in several metrics--30-day mortality from heart attacks and ischemic stroke; post-op blood clots; post-op sepsis; mortality from breast, colorectal, and cervical cancers--several of which involve some of the most significant causes of death in the US and worldwide, the US leads other similar countries.

It's arguable whether the US healthcare system provides better quality care than other countries because "quality" is a multi-faceted concept, and it's arguable whether the higher quality in certain metrics in the US is a consequence of having widespread employer-sponsored health insurance. But the higher quality in certain important metrics could be perceived as a benefit of the US system.

Lastly, the US Constitution does not specify universal healthcare as a right. Actually, the Constitution doesn't specify many things, if any, that the government must give its citizens. It specifies many things that the government cannot do and cannot take from its citizens. Universal healthcare requires that the government collect higher taxes relative to its GDP, everything else being equal. So another perceived benefit of the US system is allowing businesses and individuals to keep more of their income and spend it how they see fit, which can be perceived as promoting economic growth and personal prosperity.

Answer 9

Trying to ignore the downsides, the history, and the politics, the benefits, as asked by the OP, are as follows:

• Elimination of the cost of government bureaucracy: The US federal government is incredibly inefficient at managing large programs. Nearly 30% of the federal govt income goes to medicare and medicaid (source), and it doesn't cover the majority of people (covers about 30%), and is generally considered to be low quality coverage that many doctors won't even accept.

• Creates a greater need for people to continue to work. This is a bit of an upside-down benefit here as it isn't great for workers to fear losing a job for health reasons, but the businesses and everything that relies on business productivity benefits from those workers (govt taxation and society in general), pressure on employees to continue to work has benefits for those who design these systems.

• Individual companies can negotiate on the small scale with insurers to reduce the cost of insurance for their employees. This is the reason why it is so much more expensive to buy insurance outside of employment (especially before the ACA). You just don't have much negotiating power compared to a company that wants to insure thousands of workers, but a company has much more flexibility than the government and can pit health insurance companies against each other for the best prices.

• Due to the minimization of bureaucratic waste, a large amount of money ends up in the pockets of the medical system. This means that our system attracts the best doctors from around the world (many US doctors are foreign born), some of the best equipped hospitals with more ICU beds per person than any other nation, and practically zero wait time for any medical service.

• Since companies can write off the medical insurance from their taxes, and likely can get a better deal than the govt to coverer people, the govt saves money, the companies save money, the people pay less taxes, and companies are more profitable.

• Drug companies can make enormous profits in a system where the govt isn't the payer and so cannot regulate prices. This can be seen from the negative with extremely high costs for life saving drugs, but the flip side is that that huge profit motive is what created those life saving drugs as evidenced by the fact that the vast majority of drugs are initially created in the USA. Thankfully the US patent system means that the drugs are limited to 20 years before they are cheap and generic, and really only 10 years considering the time to market. Choosing between a world where important medications are expensive for 10 years, or a world where those drugs never come into existence is a pretty easy choice.