Wyden-Ryan Reforms Employer-Sponsored Insurance

by Avik Roy

Josh and Reihan have covered the key points around Wyden-Ryan’s implementation of competitive bidding for Medicare. There are a number of other aspects of the proposal that are worth discussing, most notably its reforms of the employer-sponsored insurance market.

Over at my Forbes blog, I summarize this aspect of Wyden-Ryan, which could have a substantial impact on the private insurance market:

One of the most intriguing aspects of the Wyden-Ryan plan is its drive to gradually migrate our inefficient, employer-sponsored private insurance system to a true individual market where people buy health insurance on their own.

Here, Wyden and Ryan are borrowing from Wyden’s proposed Free Choice Act, in which employees could choose to opt out of their employer-sponsored plan, and take the money to buy a plan of their own choosing on the private market. The opt-out only applies to workers at firms with 100 or fewer employees. If these workers buy a plan on the open market that costs less than what their employers would have paid for, they can pocket the difference as taxable income.

In the absence of Obamacare, this is a very attractive idea. Instead of simply ending the $300 billion-a-year employer tax exclusion, creating a massive disruption of the private insurance market, the opt-out idea allows for a voluntary, gradual transition to an individual health-insurance market. When people buy insurance for themselves, they are more likely to shop for value, instead of overspending on overly comprehensive benefit packages. That, in turn, brings down costs for the overall system.

Likely what would happen is that healthier individuals would opt out of the system and choose cheaper, consumer-driven health plans that pair high-deductible insurance with health savings accounts. Sicker individuals would stay in the conventional employer-sponsored system. This could, in theory, drive a form of adverse selection, driving up costs for the shrinking pool of sicker beneficiaries. However, the savings from the opt-outs might be worth it.

If Obamacare stays on the books, the opt-out idea could actually cause problems if it wasn’t structured the right way. A poorly conceived opt-out, combined with Obamacare’s exchanges, could increase the incentives for employers to dump workers onto the subsidized Obamacare exchanges.

There are a couple other salutary aspects of the plan: (1) it extends the means-testing in Medicare parts B and D throughout the whole program; (2) it seeks to reform Medicare Advantage such that the program can pass cost savings on to seniors (it is currently prevented by law from doing so); (3) it intends to introduce cost-sharing reform to the Medicare program.

More here.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.