Aside from the inequalities in cost and availability caused by the employer-based system, there are a number of other problems caused by the unlikely connection between employment and health coverage.  Many of these problems are overlooked in discussions on health care reform, because the debate is often between the merits of a public versus a private system of health provisions, ignoring the anomaly of the employer as a factor.

Risk Selection and Risks to Employment

In a given year, five percent of the population will account for 50 percent of medical expenditures; 20 percent of the population will account for 80 percent.  Biased risk selection suggests that those more likely to need health care are those most likely to purchase medical insurance.  An employer who offers health benefits that their competitors do not will attract higher-risk individuals to their employment, adversely affecting their risk-selection.  In order to keep a company’s health care costs down, an employer can structure the benefit plan to keep risk selection low.  Employers offering a variety of plans can structure premium contributions to favor a particular plan, and by excluding certain benefits, force high-risk individuals into plans requiring higher employee-contributions.  An employer can choose to not offer coverage for particular high-cost treatments.[1]

At its worst, risk selection encourages employers to follow hiring practices that discriminate against those in high-risk groups, like older employers, or those with pre-existing conditions.  Studies show that health insurance costs affect employers decisions on hiring those aged 55-64: companies that offer health benefit plans are less likely to have new hires in that age group than companies that do not offer health coverage.  The likelihood further decreases in firms with more expensive benefit plans.[2]

While federal law prohibits employers from accessing information on or performing medical examinations on employees, employers who self-insure have access to information regarding the employee’s use of provided health benefits, and to the cost that employee’s coverage incurs.  This knowledge can be abused in many ways, and can certainly influence decisions affecting continued employment.  Largely unregulated or dispersed health policy can support such corrupt practices.  While the Americans with Disabilities Act of 1990, or ADA, prohibits employers from requiring certain physical examinations or from asking certain questions, it does not restrict the employers’ access to claims data regarding the employee or family, nor does it prohibit the employer from requiring medical underwriting or request of other information related to health benefits.[3]

Lack of Portability and Permanence

When an individual in the United States workforce purchases health insurance through their employer, that insurance is neither permanent, nor portable, but rather temporary for the duration of the individual’s employment.[4]  Therefore, a worker’s coverage can lapse because of loss of a job.  In the event that the job loss is caused by an illness, this leaves the individual in a particularly precarious situation.  Family members receiving coverage as dependents of a worker will also lose those benefits in the event of the worker’s job loss, but also in the event of divorce, or death of the worker.[5]

Passed in 1986, COBRA intended to help prevent a lapse in coverage caused by transitions in employment.  The act allows a former employee to continue their coverage for a limited time, by assuming the full cost of the premium payment plus a two percent administration fee until their new coverage begins.  Even without the employer subsidy, COBRA coverage still costs less than the cost of an equivalent plan in the individual market.  However, particularly in the event of unemployment, coverage through COBRA can be unaffordable.  Only the purchase of an individual plan can offer the consumer total portability and permanence, but as explained earlier, these plans are typically unaffordable for those in need.[6]  Additionally, while COBRA will protect individuals and families from a lapse in coverage, it does not prevent a change in plan that comes with beginning employment with a new firm.  Individuals often must change doctors when they change jobs in order to find a provider in their new plan.[7]

Lack of Choice and Market Forces

Advocates of the private insurance system often demonize the concept of a single-payer government-based system as “socialized medicine,” a phrase that evokes nightmares of poor quality, inefficiency, and limited choice resulting from the removal of market forces.  However, the employer-based system creates a reality much like this myth.  The end-user (the employee) of health insurance is not the consumer (the employer), since it is the employer and not the employee who actively shops for an insurance plan; market forces are therefore severely weakened in the employer model in which the insurance companies do not have to compete for the end-user.[8]

The employer-based model gives most employees only minimal choice between benefit plans designed by their employer. About half of covered employees are offered only one health insurance plan by their employer; in the small companies that do offer health insurance, there is generally no choice of plan.[9]  Some argue that Americans prefer the current system in which their employers do the bulk of the work of investigating, purchasing, and administering health insurance plans.  True or not, that is a great step away from a competitive, free-market system.

If Congress had seen fit to allow employers to procure food and automobiles for employees on similarly tax-favored terms, then today employer-provided food and automobiles probably would seem to be preferred by Americans, too, especially if unemployed Americans did not enjoy the same privilege. Under those circumstances, Americans probably would favor that system even if their choice and use of automobiles and food were paternalistically “managed” by their employers, as is their health care today.[10]

Given all of the mechanisms built into the current system that give preference to those receiving coverage through their employer, it does not offer the end-user viable alternatives provision of health benefits by their employer.

Finally, in terms of the public versus private debate, the American employer-based private insurance system is not quite private.  It is more accurate to describe the system as one of private insurance for those who can afford it, and public services of the poor.  Additionally, since the IRS declared employers’ contributions to health benefits tax-deductible, by forgoing tax income, the federal government is already subsidizing the supposedly private health insurance system.[11]  The federal subsidy of employer-based health insurance is enormous, representing lost tax revenue of approximately $100 billion per year.[12]

Who Is at Risk with Self-Insurance?

End-users of health care are removed from the employer’s decision as to whether or not a company will self-insure.  In fact, employees rarely know if their health plan is a self-insured plan.  Licensed insurance companies act as third party administrators for many self-insured plans, giving the appearance that the licensed insurance company is providing the insurance and not simply administering it.  An employee cannot make a fully informed decision, and given choice of health plans, an employee cannot know if their health insurance is protected by certain regulations.  Additionally, insurance regulators investigating employee health plan complaints have no jurisdiction over self-insured plans.[13]

A plan sponsor may be willing to expose their employee to a greater degree of risk than the employee would have accepted had they been aware of the difference.  States may regulate the solvency of insurance companies, there are no federal standards to do so for self-insuring firms.  Polzer and Butler illustrate this danger in the case of an employee in Oklahoma left with over $100,000 in medical bills after the employee’s firm declared bankruptcy rather than pay the medical expenses.  Studies suggest that at times an employee’s health care costs can certainly become large enough to put many small firms at risk[14]

[1] Institute of Medicine, 9, 169, 171-172.

[2] Frank A Scott and Mark C. Berger, John E. Garen, “Do Health Insurance and Pension Costs Reduce the Job Opportunities of Older Workers?” Industrial and Labor Relations Review Vol. 48, No. 4 (Jul., 1995), 775.

[3] Institute of Medicine, 9, 17, 147-148.

[4] Reinhardt.

[5] Bodenheimer et al., 17.

[6] Pauly.

[7] Alain C. Enthoven, “Employment-Based Health Insurance Is Failing: Now What? Health Affairs (May 28, 2003), 7.

[8] Reinhardt.

[9] Pauly et al., and Reinhardt.

[10] Reinhardt.

[11] Bodenheimer et al., 7, Institute of Medicine, 71.

[12] Seifert et al., 9.

[13] Polzer et al.

[14] Polzer et al. See note n8.