Wednesday, October 29, 2008

The Perversity of Employer-Based Health Insurance

I wrote yesterday and this morning about the problems underlying the liberal arguments against individual-based health insurance, the conservative/libertarian arguments against single-payer health insurance, and the far greater problems underlying liberal arguments in favor of the current employer-based health insurance system. I argued that the only solution to the problems of health insurance and care in this country lies in moving to individual-based insurance while simultaneously - and contrary to libertarian doctrine - permitting a sizable expansion of government safety net programs along the lines of Medicare, Medicaid, and SCHIP.

Responding to the same article to which I was responding, Ron Chusid, another blogger for whom I have massive respect (and who is also a doctor) cites with approval an argument that de-incentivizing employer-based health insurance, as the McCain plan seeks to do, will not only discourage employers from providing health insurance, but also that it will increase the costs of insurance to individuals because individual insurance plans are more expensive.

There are several problems with this latter argument, which is premised in the notion that employers are able to negotiate lower rates and better policies due to their large size. First, the fact is that most Americans currently have employer-based health insurance, yet our health care system is about the most expensive in the world, which suggests that employers don't do a very good job negotiating better rates.

Second, to the extent employers are able to negotiate better rates, those gains are lost because the insurance company has no need to treat the end consumer as a customer since the employer is the real customer. This creates an incentive to deny or restrict benefits or to create administrative hurdles to the granting of claims (all of which raise the final costs to the individual); indeed, Ron himself has indicated that under the current system, it is usually a worse bureaucratic hassle for doctors to receive payments from insurance companies than the government (he alludes to this here, although I know he specifically made the point in another post). But this perverse incentive is eliminated when the customer and the consumer are the same thing. Third, employer-based health insurance has a lot of deceptive costs to the employee; specifically, although an employee may nominally only need to pay a percentage of the insurance costs directly out of their paycheck, the fact is that employers may (and, I know from experience, effectively do) largely shift their "share" of the costs back onto the employees by simply paying lower initial salaries and wages. Indeed, employer-based health insurance largely arose as a way of replacing pay raises during WWII, when wage and price controls prevented pay raises.

This isn't to say I support the McCain proposal. For the most part, I don't, and many of the ways it seeks to achieve individual-based health care are extremely wrongheaded. His attempts to argue that he wants to preserve the employer-based health insurance system are either dishonest or completely moronic. But at the same time, liberals are wrong to now argue for the superiority of employer-based health insurance to individual-based health insurance. On this point, they should keep in mind the fundamental truth that, as Ezra Klein said yesterday, employer-based health insurance has "arguably been among the most costly and perverse mistakes in the history of American public policy." And of course Klein is right - it combines the worst elements of socialism and capitalism, without any of the mitigating effects of either. So terrible is the existing system that I would actually prefer a complete single-payer system to the existing one, at least if that is the only choice we have (and, thankfully, it isn't).