The Health Problem Congress Created and Cannot Solve

It’s hard to solve a problem unless you first acknowledge it exists. And it’s hard to acknowledge the existence of a problem if you created it yourself. That in a nutshell summarizes a unique feature of the American health care system. Since the end of World War II, the U.S. tax system has treated group insurance obtained through an employer differently from insurance purchased by individuals

For the past 70 years, premiums paid by an employer have been tax-free to the employee. From time to time, individual purchases have benefited from one tax break or another, but they have never been treated as generously as insurance obtained at work.

Even though Blue Cross group insurance might be identical to Blue Cross individual insurance, the tax law encourages us all to prefer the former to the latter. All we need is an accommodating employer to pay non-taxed premiums instead of additional taxable wages. Competition for labor ensures that virtually all employers of any size are more than willing to do that—even though most employers these days would rather not be involved in health care matters at all.

Here is the problem. Suppose an employee has been paying premiums (through an employer) to a health plan for 30 years. Then he gets too sick to work, has to quit his job and turns to the individual market for health insurance. Since his expected health care costs are quite high, an actuarially fair premium would also be quite high. In fact, it might be so high that the individual would be just as well off paying his own medical bills directly.

This creates a fairness issue. This individual did the socially responsible thing. He paid premiums to the system every year—rather than forgo health insurance and indulge in additional personal consumption. Yet when illness struck, the fact that he had been paying into the system for 30 years was of no consequence because he was no longer on the employer’s plan. He would have been better off if he had never paid an insurance premium at all.

To many on the left, the solution is to force insurers in the individual market to accept such high-cost enrollees for the same premium as healthy enrollees. What difference does that make? All insurance involves pooling. In health care, those who stay healthy subsidize those who get sick. But here we have two different pools—one that collects 30 years of premiums from a healthy enrollee and one that is stuck with all the medical bills.

That’s not fair to the new insurer. But suppose you don’t care very much about fairness for insurers. There is another reason why you should care. Every health insurer must collect enough in premiums to pay its claims. So, it’s not really the new insurer that is penalized by this solution. It’s every buyer in the individual market—who must now pay higher premiums.

As it turns out, the individual market is quite small. It’s only about 6 percent of the population. So, if everyone who gets too sick to work migrates to the individual market and that market is required to insure everyone with no regard to health status, a small minority of the population will be saddled with the full burden of that migration.

The solution favored by the left doesn’t just impose an inequitable burden on a tiny slice of the public, it encourages the problem to get worse. Some older workers with chronic health problems remain at work only because of health insurance benefits. If they can retire early and get the same benefits in the individual market many will do so, putting an even larger burden on the small number of individual payers.

Remember, Congress (representing all of us) encourages people to join an employer’s group plan. Yet when we leave our employer, eventually we must also leave the health insurance group. The solution favored by many on the left is to take a social problem (created by Congress) and then make the folks in this tiny individual market pay the cost of solving it. Is that fair?

Yet that is what Obamacare does. It’s the main reason why premiums in the individual market doubled in short order after Obamacare was enacted, why deductibles are three times what they are in a typical employer plan and why narrow networks exclude the best doctors and the best hospitals.

So, what can be done? The most rational place to start is with root causes. If employers were able to buy individually owned insurance for their employees, the insurance would travel with the employee from job to job and in and out of the labor market. As long as employees aren’t forced to leave their insurance plan when they leave an employer, most of the problems of “pre-existing conditions” would vanish in a heartbeat.

So why aren’t we doing that? Some employers once did purchase such insurance for their employees. However, 1996 legislation made the legality of that practice unclear. Then, the Obama administration threatened employers with large fines if they engaged in it! The Obama fines, however, were imposed by executive order. Those orders were reversed by a Trump executive order. As of January 1, 2020, employer-purchased, individually owned insurance is now legal.

A second solution is post-retirement health benefits, which are still provided by some large employers. With this arrangement, employees stay in the employer’s health plan from the time of retirement until they are eligible for Medicare. Unfortunately, Obamacare encourages employers to drop these plans. Even if the retiree doesn’t get a subsidy from Obamacare, premiums for older enrollees are kept artificially low (offset by artificially high premiums for younger buyers). It may be cheaper for the employer to pay some or all of the Obamacare premium rather than provide the same coverage privately.

Good public policy would encourage employer-provided health care benefits after retirement rather than discourage them.

For employers who chose not to buy individually owned insurance and who chose not to offer post retirement care, there is a third solution. They should pay a small premium to a state risk pool, or reinsurance pool. The pool would have only one very limited purpose: to pay for any extraordinary costs that migrate from the group to the individual market.

Note that under all three solutions, the group market would no longer be dumping costs on the individual market. We would no longer be forcing 6 percent of the population to pay for a social problem created by government policy.

We would solve the problem of “pre-existing conditions” without causing premiums and deductibles to soar in the individual market.