Why Americans need to stop getting health care through their employers
It's the best way to save the U.S. health care system
Even if the Affordable Care Act survives the Supreme Court later this summer, it won't be the end of the ObamaCare wars. In 2018, the so-called "Cadillac tax" kicks in, which is destined to set off a whole new round of political fighting.
It's a 40 percent excise tax that applies to all employer-provided health insurance coverage above a certain value threshold: $10,200 for individual plans and $27,500 for family plans. So if the individual package you get through your job is worth $12,000, the tax will hit $1,800 of it.
The start of the tax was delayed because it was so politically controversial. But according to a report this week in Politico, its looming arrival is already playing a role in negotiations between workers and employers. Groups on both sides of the aisle — from unions to the Chamber of Commerce — are lining up to call for the tax's death, and Democrats sound less than eager to defend it.
This is significant for two reasons. One, the Cadillac tax is one of the big reasons ObamaCare originally scored as a deficit-neutral bill. While the revenue from it will ramp up slowly, it will eventually cover the annual cost of ObamaCare's insurance subsidies all by itself.
Two, the Cadillac tax is a noble — albeit clunky — effort to undo one of the original sins of American health care policy: the fact that you can get coverage through your employer tax-free.
Why a sin? Well, when it comes to something like food, for example, markets work pretty well. As people shop for better deals, competitive pressure forces sellers to either cut prices or find some new way to provide food; then competitive pressures set to work cutting the price of that. As long as everyone has the money to buy food, the market does a good job distributing that fundamental human need.
Health care is not like food. It can be difficult to predict when we'll need it, and some of those expenditures can be enormous. Just 5 percent of Americans account for half of the spending in the health care system — about $40,000 per person per year. Twenty percent of Americans account for 80 percent.
There's simply no way people can be expected to shoulder those costs. This is why society invented insurance in the first place, and why most spending on health care will always be funneled through an insurer of some form or another.
But that also introduces a middle-man that muddles the market. Customers are no longer shopping for health care directly. They're shopping for insurance, and the insurers are shopping for health care. In particular, insurers profit by taking in more revenue from premiums than they spend on health care for their customers. So insurers have a profit incentive to get as many healthy customers as possible, and to drive away as many sick people as possible.
In a functioning market, profits are a sign you're delivering better value to your customers per dollar. But in the health insurance market, there's a short-circuit: Profits can just be a sign you're gaming the risk pool by screwing sick people.
This was the infamous issue surrounding pre-existing conditions. And ObamaCare fixed it by forbidding insurers from charging people different premiums based on medical history. This wasn't just an act of humanitarianism — it also made sure that, on ObamaCare's exchanges, the health insurance market acts more like other markets.
What does employer-provided coverage have to do with all this? It introduces another middle-man. Workers negotiate with employers, then employers shop for insurance, then insurers shop for care. If insurers hike prices, employers can look for a better deal. Or they can just shift the costs to their employees, saying they'll "compensate" workers by spending more on the same benefits instead of wages. And employees might not notice; they'll just see their wages and benefits package. It's another factor distorting the market.
The fact that the insurance they buy is tax-free encourages employers to be bigger spendthrifts than they otherwise would be, further driving up the cost of health care. There's also what's called "job lock" — instances in which people avoid switching to a better job, or taking a risk on their own business or entrepreneurial venture, because they're afraid they might lose their coverage.
Finally, the tax exclusion for employer-provided coverage also loses something close to $200 billion in revenue annually, and it benefits high-income workers much more than low-income workers. (The lowest-income workers, who rarely if ever get coverage through their job, benefit not at all.)
Whether you get your health coverage through the government, the private markets, or some ObamaCare-esque hybrid thereof, it really should be a completely separate matter from your employment. Yet nearly half of Americans get their coverage through their job, which is almost unheard of in other Western countries.
One of the great virtues of the Cadillac tax is it will slowly unwind this system. Its threshold is designed to hit more and more employer-provided plans over time: 60 percent by 2022. It's a crude way to do it — conservative wonks, to their credit, have suggested just capping the tax exclusion instead, which would be cleaner — but it's what we got. Over time it will force people out of the employer-provided system, and that is a good thing.
This also highlights why ObamaCare's exchanges and aforementioned reforms to the insurance market are so crucial: They ensure people will have a safe place to land. (Though ObamaCare's subsidies also need to be drastically increased.)
The problem is that it's politically impossible to say this is a good thing. Employer-provided coverage has been the only safe harbor in the American health care system for so long that people are understandably terrified of losing it. And the scary thing about the new push to kill the Cadillac tax is it suggests any effort to roll back the employer-provided tax exclusion — including the conservative alternative — will be dead on arrival.
The employer-provided system will probably still die on its own eventually — it's economically unsustainable. But its demise may be long and costly.