Why employers won’t cut and run when individuals own health insurance

Americans agree: Our health-care system needs a serious overhaul. A number of recent surveys, including one by Harris Interactive and another by the Commonwealth Fund, show that over 80 percent of Americans believe the system needs either “fundamental change” or “a complete rebuild.”

Most of us rely on an employer for health coverage. Unless you’re retired, your employer in all likelihood picks, pays and actually owns your health coverage.

If the status-quo system relies on employers, and if the system needs fundamental change, then it stands to reason that we should take a hard look at revamping the employer’s role.

Serious health-care reforms do just that. The Mayo Clinic Health Policy Center’s current reform principles focus on moving from employer ownership to individual ownership of health coverage.

Leveling the field

Most reforms that promote individual ownership would eliminate the current tax preference for employer-paid coverage and, instead, level the field so that all Americans get the same health-care tax advantages. Sen. John McCain’s plan does this by creating a $2,500 health-care tax credit for individuals and a $5,000 tax credit for families. (Contrary to Barack Obama’s charge that McCain’s plan taxes health benefits for the first time ever, the McCain plan offers a far more generous tax benefit for low- and middle-income America than the current employer-based tax exemption.)

Individually owned coverage would fix big, systemic flaws. When individuals own their coverage, it’s portable from job to job. Portability makes health coverage more secure at a time when jobs are less stable. Moreover, according to the Mayo Clinic, individual ownership “gives patients more control and choice,” and because insurers would now compete for the individual, the insurer would offer more competitive rates and improved service. This is intuitively true.  You don’t need a degree in economics to understand that when a family pays for something from its own budget, the family will look for the best deal that best meets its needs.

Nonetheless, many people find it tough to believe that they would be better off taking ownership over their health coverage.

The trouble is that too many people mistakenly believe they will be left entirely on their own to wander the wilderness of coverage choices where the cost of whatever they choose comes entirely out of their own pocket.

It’s not hard to see why.

It’s not an either/or scenario

Surveys and news stories tend to oversimplify policy choices to either/or scenarios — either you’re on your own or your employer takes complete care of you. For instance, to gauge the public mood over the McCain plan, the Kaiser Family Foundation asked people how difficult it would be to manage coverage on their own as if the automatic implication of the McCain plan was to fend for yourself.

The public needs to understand this is not an either/or scenario.

Individually owned coverage does not mean removing employers from the health-care system entirely. Employers can still be an instrumental resource for navigating the system. Moreover, employers can retain a strong funding role even when they transfer buying decisions to workers.

While I hesitate to bring up 401(k) retirement saving plans at a time when so many Americans lament unparalleled financial losses, the analogy is just too perfect to demonstrate how employers might maintain a vital role even when coverage is individually owned. So I ask that you momentarily suspend your disgruntlement or despair or whatever your present emotion might be toward your 401(k) and focus wholly on its mechanics.

The reality is, employers could take a hands-off approach to individually owned 401(k)s if they chose, yet they remain intimately involved, which should allay a number of worries over individually owned health coverage.

• People worry that employers will stop offering health plans altogether. Employers offer 401(k)s because it’s a vital recruitment tool; a health plan is no different.
• People worry that employers will no longer fund individual health coverage. Nothing forces employers to match their employees’ 401(k) contributions, but most employers do offer a match. Again, recruitment matters.
• People worry that choosing health care will be too confusing. Not only do 401(k) plan designs simplify investment choices, but they increasingly offer sophisticated tools that help workers automatically buy and sell funds in order to remain diversified against the sort of financial crisis we’re currently in.
• People worry that individuals will drop coverage. Employers recently increased enrollment in 401(k)s through automatic enrollment.  Employers could similarly auto enroll workers in individually owned health plans.

Unlike 401(k)s, health coverage carries an added benefit for employers: Good health care aids employee productivity by reducing sick days and keeping workers more focused. So when the system moves toward individually owned health coverage, don’t expect your employer to abandon you.  It’s just not good business.

Peter J. Nelson is a lawyer and a policy fellow with the Center of the American Experiment.

This commentary originally appeared in MinnPost.com on October 29, 2008.
Permission to reprint in whole or in part is hereby granted.