Two Cheers For Employment-Based Health Insurance

Abstract

Employment-based health insurance is the Rodney Dangerfield of health policy: it gets no respect from anyone. Liberal enthusiasts of a one-payor system view the existence of employment-based health insurance as a major impediment to the achievement of universal comprehensive coverage. From the opposite end of the political spectrum, free market enthusiasts attack employment-based health insurance on the grounds that individual preferences are systematically ignored, and cost-quality tradeoffs are inappropriately constrained when employers select coverage for employees. Advocates for a patient bill of rights complain that managed care is favored by employers (not employees), and argue that employers are motivated by profits, instead of the best interests of their employees. Prominent health policy scholars and the media routinely condemn the linkage between employment and health insurance. Even employers, who offer coverage as a way of attracting and retaining employees, are at best lukewarm about their role in the coverage market. Given these unfavorable attitudes, it is not particularly surprising that reforming these arrangements has been a perennial topic on the policy agenda--even though most employed individuals with health insurance obtain their coverage through their employers, and the employment-based market provides coverage for approximately 177 million Americans. During the past six decades, thousands of pieces of legislation have been introduced at the state and federal levels, seeking reforms ranging from the incremental to the radical. Legislation has sought to change the tax treatment of health insurance premiums, encourage more people to purchase health insurance on their own, partially or completely eliminate employers from the coverage market, mandate all employers to provide coverage, require employers to include specified benefits or providers in their coverage, and the like. Articles supporting and criticizing each of these competing proposals and offering additional reforms fill the pages of medical, legal, economic, and health policy journals. This Article steps back from this morass of competing proposals and considers the employment-based coverage market from a comparative institutional perspective." This approach allows us to assess the costs and benefits of the existing system against the likely alternatives, and provide a more balanced foundation for assessing proposed reforms. As the title of this Article suggests, we conclude that the employment-based coverage market deserves "two cheers," and relatively modest incremental changes are all that are required (or for that matter, politically likely, during the foreseeable future) to ensure the continued smooth functioning of the employment-based coverage market. Our assessment that the employment-based coverage market deserves "two cheers" is unlikely to satisfy most commentators, irrespective of whether they favor a one-payor system, universal adoption of medical savings accounts, or something in between. The score we assign to employment-based health insurance obviously falls well short of perfection. Yet, it is important to keep in mind that perfection is never an appropriate standard for judging real world policies and institutions."' Any "reform" of the employment-based coverage market will replace the existing institutional arrangements and problems with new (and not necessarily improved) institutional arrangements and problems." Prudent policymaking requires that one has a full appreciation of the advantages and disadvantages of existing arrangements, and a framework for determining whether proposed reforms, on balance, make things better or worse. In this Article, we seek to provide the information and analysis necessary to accomplish both of these goals.