Congressional Health Care Briefing Book |
Creating Personal and Portable Benefits
"Federal tax law and employee benefits law are encouraging many people to be uninsured."
"Health insurance should be personal and portable." |
Under current employee benefits law, employers have few opportunities to institute sound cost-containment practices without substantial income tax penalties, and employees have few opportunities to purchase less costly health insurance or policies tailored to their individual and family needs. In general, the tax law prevents employees from choosing between wages and health insurance and insists that all employees be offered the same coverage on the same terms. As a result, employers often provide an expensive group policy with a package of benefits that no single employee may want. To make matters worse, the employer is forced to adopt a health care plan in which benefits are individualized, but costs are collectivized. Although large employers have a few more options, they too are forced into a system which has two devastating defects.
First, under the current system there is no direct relationship between health insurance premium costs and individual employee wages. In many cases employees do not know what the premiums are. In those cases where they are made aware (e.g., when employees are asked to pay part of the premium), each employee typically is charged the same premium -- regardless of age, sex, place of work, type of work or any other factor that affects real premium costs. The upshot is that the individual employee sees no relationship between the cost of employer-provided health insurance and personal take-home pay. Small wonder that employees of large companies demand lavish health care benefits. Second, there is no relationship between wasteful, imprudent health care purchases and salary under conventional employer health plans. Under most policies, it is as though the employee has a company credit card to take to the hospital equivalent of a shopping mall. The employee will find many interesting things to buy, all chargeable to the employer. Under this system, employees have no personal incentives to be careful, prudent buyers of health care. In the face of constraints imposed by federal policy, employers are trying to hold down health care costs by taking actions that have very negative social consequences. Unable to adopt a sensible approach to employee health insurance, many large firms are asking employees to pay (with after-tax dollars) a larger share of the premium. Often, employers will pay most of the premium for the employee, but ask employees to pay a much larger share for their dependents. These practices result in some employees opting not to buy into an employer's group health insurance plan. More frequently, employees choose coverage for themselves but drop coverage for their dependents. Indeed, three million people who lack health insurance are dependents of employees who are themselves insured. Because employee benefits law prevents smaller firms from adopting a sensible approach to employee health insurance, many are responding to rising health insurance premiums by canceling their group policy altogether. Often, employers will give bonuses or raises in an attempt to pass on to employees the gain from eliminating the health insurance benefit. Employees are then encouraged to purchase individual health insurance policies (with after-tax dollars) on their own. Many, of course, do not. One of the great ironies of employee benefits law is that, although it was designed to encourage the purchase of health insurance, its more perverse provisions are increasing the number of people without health insurance. Because employers cannot individualize health insurance benefits, many are turning to other practices that are increasing the number of uninsured people. The federal tax law has created yet another problem. It has encouraged an employer-based system under which people lose their health insurance when they leave a firm. Employers often can cut back coverage even after an employee gets sick. And when employees with a preexisting illness leave, they may find it impossible to obtain insurance coverage elsewhere. To remedy these problems we recommend that: (1) health insurance benefits be made personal and portable; (2) health insurance premiums be included in the gross wages of employees, with tax credits for those premiums allowed on individual tax returns; (3) individual employees be given the opportunity to choose between lower wages and more health insurance coverage (and vice versa); and (4) individual employees be given freedom of choice among all health insurance policies sold in the marketplace. [See the sidebar on Solving Health Insurance Problems for Small Employers and their Employees.] These recommendations would have several advantages:
Solving Health Insurance Problems |
| Problem | Solution |
| Costs differ by age, sex, type of job and other employee characteristics |
Reduce each employee's gross salary by the amount of that employee's premium |
| Not all employees want or need employer-provided coverage | Give health insurance only to employees who want it |
| Some employees have preexisting illnesses | Negotiate the best coverage possible for each individual employee |
| Employees have different preferences about health insurance coverage (deductibles, services covered, etc.) | Allow each employee to choose a policy best suited to individual and family needs |
* Each of these solutions requires changes in the tax law and employee benefits law to avoid costly tax penalties.