Over the weekend, Ross Douthat argued that left-of-center and right-of-center health policy analysts tend to be skeptical of the virtues of employer-sponsored insurance, and that allowing ESI to slide into the dustbin of history wouldn’t be such a terrible thing. Ramesh Ponnuru replied with a modest defense of existing health-insurance arrangements, including employer coverage:
Employer coverage has its benefits, and in a free market where it had no special privileges over other forms of health insurance it might account for a large share of the market. That’s fine, and the government ought not to do anything to prevent it. Some conservatives and libertarians like the idea of everyone’s purchasing catastrophic insurance for himself (sometimes with help), and that model has its attractions too, but there is no good reason for the government to impose it on everyone.
Bryan Dowd, a health economist at the University of Minnesota, kindly shared his thoughts with me on this subject earlier this year. Specifically, Dowd addressed the concern that equalizing the tax treatment between the group and individual insurance markets would lead to a collapse of employer-sponsored insurance:
Employment-based health insurance is enormously efficient in the sense that employees are unlikely to change jobs just to get a better deal on their health insurance. Large employers thus are able to form relatively stable insurance pools that allow them to offer longer-term risk protection than typically is available in the individual insurance market. Particularly in large firms, if you get cancer next year you still can expect to pay the same community-rated premiums as your fellow employees, as long as you are healthy enough to remain employed. I thought that the ability of employment-based health insurance to maintain a stable insurance pool would be enough to ensure its continued existence, even in the absence of favorable tax treatment.
The goal of the state-based insurance exchanges established under the Affordable Care Act is to create similarly stable insurance pools that can offer longer-term risk protection for those who lack access to large group employer-sponsored insurance. But he offers a few cautionary notes:
The inability to purchase an insurance policy that offers long-term protection against losing health insurance for people who lose their job and have a serious health condition was a “missing market” prior to the PPACA legislation. Every risk-averse person should have been willing to purchase such insurance (without being mandated to do so) if it were available at an actuarially fair premium, but it wasn’t, and it isn’t clear that the private market is structurally capable of offering that insurance product. The PPACA exchanges at least offer the hope of filling that missing market. Had I been overseeing the PPACA legislation, I would have explained that to the public and then proposed a dedicated source of revenue for that long-term risk protection product that was not mixed with other goals such as income redistribution.
While I hope that the exchanges will work, I cannot be overly optimistic. Minnesota tried to run such an exchange in the 1990s. It operated for seven years and then folded. I suspect that the state and federal entities running the PPACA exchanges soon will discover that they need late enrollment penalties and much harsher penalties for remaining uninsured. They also will need strict monitoring of insurers’ attempts to “cherry pick” the good risks out of the exchange pools by offering them slightly different policies at lower premiums.
The architecture of the Affordable Care Act looked rickety from the start, and the recent delay of employer mandate and income verification enforcement measures suggests that it will unravel even more quickly than some of its critics had anticipated. The most logical next step, in my view, is to move towards fixed-sum refundable, advanceable tax credits, an idea that has been advanced by many conservative health policy scholars, including James Capretta. As a transitional step, one might limit these credits to those who do not receive employer-sponsored insurance, while the value of the tax exclusion for ESI might be capped. (See our discussion of Caprettacare from a few months back.) Reforming the tax treatment of medical insurance wouldn’t address the rising cost of Medicaid, but it would certainly make our health system more coherent. And as the employer mandate and income verification imbroglios demonstrate, that is no small thing.