Ten Steps to Reforming Baby Boomer Retirement
Thursday, March 23, 2006
by John C. Goodman, Devon Herrick, Matt Moore
Table of Contents
- Executive Summary
- Step 1. Improving Traditional Pension Plans
- Step 2. Improving 401(k) Plans
- Step 3. Expanding IRAs
- Step 4. Removing Penalties on Work
- Step 5. Repeal the Social Security Benefits Tax
- Step 6. Using the Roth Method of Taxation
- Step 7. Making Health Insurance Portable
- Step 8. Tax Relief for Post-Retirement Health Insurance
- Step 9. Creating Health Savings Accounts for Seniors
- Step 10. Paying for Long-Term Care
- About the Authors
Step 7. Making Health Insurance Portable
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.