One of the strange features of the U.S. health care system is that the health plan most of us have is not a plan that we chose; rather, it was selected by our employer. Even if we like our health plan, we could easily lose coverage because of the loss of a job, a change in employment or a decision by our employer. This lack of individually-owned, personal and portable health insurance affects all Americans, but especially older workers, who are more likely to have health problems.

"Workers can lose health insurance when they change jobs or retire early."

Problem: Lack of Continuity of Insurance. Virtually all employer health insurance contracts last only 12 months. At the end of the year, the employer - in search of ways to reduce costs - may choose a different health plan or cease providing health insurance altogether. Strangely, the only people with private health insurance guaranteed to last longer than one year are people who purchase insurance on their own, since federal law guarantees the renewability of individually-owned policies. Those policies, which are genuinely portable insurance, are actually penalized under the tax law.

Problem: Lack of Continuity of Care. ³⁶ Employer-sponsored health care largely evolved at a time when most health insurance was fee-for-service. Fee-for-service meant an employee could see any doctor or enter any hospital and insurance paid all or most of the bills. As a result, a change of jobs usually did not cause undue disruption, provided that both the new and old employer had health insurance plans.

Things changed after the introduction of managed care. Today, as in the fee-for-service era, employees who switch jobs must also switch health plans. All too often that means changing doctors as well, since each health plan tends to have its own network. For example, if an employee (or a member of the employee's family) has a health problem, there may be an interruption in the continuity of care. Additionally, different employer plans have different benefit packages. Thus, some services, like mental health, may be covered under one employer's plan but not under the next employer's plan.

These disruptions affect some families more than others. For people who are healthy, they may amount to minor inconveniences, but for others the problems can be severe. They can affect the decision to leave one job for another; for example, a study of chronically-ill workers found that those who relied on their employer for health coverage were 40 percent less likely to change jobs voluntarily than workers who obtain their health coverage elsewhere. ³⁷

Problem: Perverse Incentives for Employers and Employees. Most employees view health insurance as a fringe benefit. When they enter the job market, they primarily search for employment opportunities that reward them for their skills and abilities. But a growing minority of workers approach the job market very differently. These are individuals with a family member (often a spouse or child) who has very high health care costs. When these workers compare job opportunities, they are primarily comparing health plans. For them, health insurance is the main attraction, rather than the job or the pay.

Clearly it is not in the financial self-interest of employers to attract workers whose primary motivation is to get their medical bills paid. To protect themselves from such potential hires, employers are increasingly altering their health plans to attract the healthy and avoid the sick. Offering small copayments for routine office visits but high deductibles for hospitalization is one technique. Long waiting periods before employees become eligible for the company's health plan is another.

These reactions by employers are rational responses to a labor market that increasingly looks like a game of musical chairs. But what is good for the employer is not necessarily good for society as a whole.

Problem: Younger Spouses and Retirees on Medicare. The lack of individually-owned, portable insurance is particularly burdensome for many women who are married to older men. When a husband retires and enrolls in Medicare, wives may be left without coverage because underage spouses cannot enroll in Medicare. Until the wife qualifies for Medicare at age 65, the couple will have to purchase her insurance with after-tax dollars. She will also likely be charged higher premiums for health insurance, since health risks tend to rise with age. And she will pay even more (or possibly even be denied insurance altogether) if she has experienced a significant gap in coverage and subsequently develops an expensive-to-treat health condition. ³⁸

"Workers' health insurance need not be tied to their employer."

Problem: Federal Laws Designed to Encourage Portability Have Actually Outlawed It. Under the current system, employers cannot buy individually-owned insurance for their employees. Specifically, lawyers interpret the Health Insurance Portability and Accountability Act of 1996 (HIPAA) to say that the only employee health insurance employers can purchase with pretax dollars is group insurance. A better alternative would be to allow employers to purchase individually-owned, personal and portable insurance for their employees. Even though employers would pay some or all of the premiums, employees could take the insurance with them as they move from job to job.³⁹

Source of the Problem: Tax Penalties for Portable Insurance. The main reason companies provide their workers with health insurance rather than pay higher wages (with which employees could buy their own insurance) is tax law.⁴⁰ Unlike taxable wages, employer-paid premiums avoid federal, state and local income taxes, as well as the FICA payroll tax. By contrast, workers who buy their own insurance get no tax break unless their medical costs exceed 7.5 percent of their adjusted gross income.⁴¹ As a result, genuinely portable insurance - insurance owned by the person who is insured - is actually penalized under the tax law.

For a typical middle-class family, government is effectively paying half the cost of employer-provided health insurance. Suppose that one year's insurance for a family of four costs $6,000. If the insurance is purchased by an employer, the employee must produce and earn $6,000 to set aside as a pretax payment for insurance rather than as taxable wages. However, if the insurance is purchased directly by the family, the employee must earn $12,000 in order to pay both the taxes and the insurance premiums. In terms of the amount of pretax income needed, insurance purchased directly with after-tax dollars costs the family twice as much!

"Portable health insurance would travel with a worker from job to job."

Creating Personal and Portable Health Insurance. Just because employers pay all or most of the premium does not mean that health insurance must necessarily be employer-specific. As an alternative, why can't employees enroll in health plans that meet their needs, and then be allowed to stay in those plans as they travel from job to job? Personal and portable health insurance would solve many of these problems.

Even though employers initially would pay the premiums (as they do today), employees would own the insurance and it would travel with them as they move through the labor market. Thus employees would get portable insurance (a characteristic of individual insurance), but at premiums closer to the norms of group insurance. [See the sidebar on personal and portable insurance.]

Although employers are expected to initially buy all their employees into the same health plan, with the passage of time some of those employees will leave and go to work for other firms. Employers will also hire new employees who are members of other plans. And, in most cases, the employer's initial group of employees will be able to switch to other plans after a transition period. The typical employer, therefore, can eventually expect to have employees in different plans. Indeed, it is possible that every employee will be in a different plan.

Advantages of Portable Insurance. Portable health insurance promises a continuing relationship with an insurer and, therefore, a continuing relationship with doctors and health facilities. It also means that people can find a health plan they like and stay in it, without worrying whether they will be forced out of the plan by an employer's decision or by a change in employment.

For employers, portable health insurance means that small groups are no longer treated as self-contained pools and rated each year based on changes in the health status of their members. Instead, employees will be members of very large pools in which no one can be singled out because of a sudden large medical expense, and premium increases are the same for all. Under this system, employees can choose their own plan and employers can limit their contribution to a fixed-dollar amount. New hires will know how much the employer is going to contribute to health insurance, just as they know the amount of their salary. Because the employer's role is largely financial, in a real sense employers will get out of the “business” of health insurance.

How can we change the way health insurance is purchased to increase consumer satisfaction with their coverage? The idea is to combine the advantages of individual insurance with the advantages of group insurance and avoid the disadvantages of both. This new, hybrid form of insurance will be called New System Plans (NSPs). Employers who assist their employees in entering NSPs through the payment of premiums will be called Defi ned Contribution Employers (DCEs).

Transition. Most employees will enter NSPs by converting from group insurance through the actions of an employer. Specifi cally, an employer will choose an NSP for all its employees, much as employers choose group insurance today. Rules that apply to the group market today would probably still apply, including the requirement that (1) employers pay a substantial part of the premium, (2) a substantial percentage of employees elect to insure, and (3) new employees elect to insure on a certain date not of their choosing. In return the group could avoid the administrative cost of individual underwriting (although this would not be a legislative requirement).

A typical transition period might involve a three-year contract. After the three-year period, employees would be free to switch to another NSP if they were dissatisfi ed with their plan. However, an individual’s entry into another NSP would not be guaranteed. During the three-year period, new employees who are not members of another NSP would be required to join the employer’s selected NSP in order to qualify for an employer contribution.

Some employers may choose to have a longer-term relationship with an insurer. For example, an NSP may agree to take all of an employer’s new employees without underwriting, provided that the employer will not contribute to the insurance of eligible employees (not insured elsewhere) unless they join the NSP.

Parallel Systems. No employer will be required to be a DCE, and no insurer will be required to offer an NSP. Therefore, for some time there will be parallel systems - with some employers and employees participating in the new system and others participating in conventional small group or large group markets.

Regulatory Status. Even though DCEs will pay premiums (to take advantage of the tax law), NSPs will be technically considered individual insurance.

Relation to HIPAA. Although federal law requires small group insurance to be guaranteed issue - meaning people cannot be denied coverage because of health status - states are free to choose their own mechanism to insure people who convert from group to individual insurance.⁴³ Most states have chosen to make such individuals eligible for their state risk pool. Under this proposal most employers who become DCEs will assist their employees in converting from group to individual insurance. Therefore, NSPs do not have to be guaranteed issue.

The Role of the Employer. Currently, employers cannot pay premiums for individual insurance for their employees. This proposal would allow them to do so. In return for this right, DCEs will have certain obligations. One such obligation is to offer a contribution toward premiums for every employee. The contribution could vary by age and other factors, but employers could not discriminate against employees based on health status. Employers would also be obliged to make a full monthly premium payment to each employee’s NSP.

High-Cost Enrollees. There are several protections proposed for individuals with high medical costs. First, NSPs that cover employees converted from group to individual (NSP) insurance must accept or reject the entire group. If all NSPs reject a group, the group can still go to the conventional small group market, where acceptance is guaranteed. Second, as an inducement to NSPs, we propose that if an NSP accepts a group below a minimum size without individual underwriting, there will be a six month look-back period during which the NSP will have the opportunity to (a) move high-cost enrollees to a risk pool, (b) qualify for reinsurance, or (c) qualify for a direct subsidy. It is important that all three subsidies (a thru c) be funded through general revenues and not from a tax on health insurance or health care. The reason: We want to encourage people to purchase health insurance and we want people to obtain health care when they need it - undeterred by taxes.

High-Cost Employees in a Mature System. In a mature system, most eligible employees would be members of NSPs, and their membership would be guaranteed renewable. Thus, an individual who develops an expensive-to-treat illness need not fear losing coverage because he switches jobs or is laid off, or because his employer switches health plans or arbitrarily changes the benefi ts covered in the existing plan.

However, some high-cost employees may fall through the cracks and become uninsured - because they failed to sign up for insurance when eligible, because they worked for an employer who did not provide insurance, because they previously had traditional insurance with another employer, and so forth. What happens to these individuals?

In some cases they will be able to enter an NSP without medical underwriting under the terms of a contract between an employer and an NSP that allows such entry. Moreover, anyone who is entitled to coverage under HIPAA will be able to obtain coverage from the state risk pool. If the individual works for a DCE, the DCE’s premium contribution will be made to the risk pool - just like an ordinary insurance premium payment.

Specialty Health Plans. We would like to encourage health plans to specialize in the treatment of expensive-to-treat illnesses, such as cancer, heart disease and so on. Specialization would encourage effi ciency and quality, as it has in hospitals and clinics that treat specifi c conditions. It should be a goal of public policy to encourage arrangements whereby individuals can leave NSPs (and perhaps traditional health plans as well) and join a plan specializing in the treatment of their condition. Such movements will require the voluntary agreement of the patient and the two plans and will almost certainly involve a payment to the specialty plan from the original plan. But both plans should gain from the arrangement because of the substitution of more effi cient for less efficient care. Patients should gain from better, specialized care.