NCPA - National Center for Policy Analysis


October 21, 2008

An end to employer-based health insurance is exactly what the American health care market needs, says the Boston Globe.  It would represent a giant step toward ending the current system's worst distortions: skyrocketing premiums, lack of insurance portability, widespread ignorance of medical prices and overconsumption of health services.

With more than 90 percent of private health care plans in the United States obtained through employers, it might seem unnatural to get health insurance any other way.  But what's unnatural is the link between health care and employment, says the Globe.  We do not rely on employers for auto, homeowners or life insurance; health insurance is different only because of an idiosyncrasy in the tax code dating back 60 years:

  • During World War II, firms competing for employees at government-restricted wages began offering medical insurance to sweeten employment offers.
  • Employers could deduct those benefits as business expenses, yet employees didn't have to report them as taxable income.
  • The IRS resisted that interpretation, but Congress eventually enshrined the tax-exempt status of employer-based medical insurance in law.
  • With health benefits tax-free if they were employer-supplied, tens of millions of Americans were soon signing up for medical insurance through work.
  • As tax rates rose, so did the incentive to keep expanding health benefits, and Americans grew accustomed to having their medical insurer pay for yearly physicals, prescriptions, and other routine expenses.

Thus, we ended up with a health care system in which the vast majority of bills are covered by a third party, says the Globe.

De-linking medical insurance from employment is the key to reforming health care in the United States.  Sen. John McCain (R-Ariz.) proposes to accomplish that by taking the tax deduction away from employers and giving it to employees.  As millions of empowered consumers begin focusing on price, price competition will flourish.  And as employers' health care costs decline, most of the savings would return to employees as higher wages, says the Globe.

Source: Jeff Jacoby, "Health care shouldn't be linked to employment," Boston Globe, October 19, 2008.

For text:  


Browse more articles on Health Issues