"The U.S. employer-based health-insurance system is failing," declares a new report by the Committee for Economic Development (CED). The CED is a Washington, D.C.-based policy think tank comprised of business and education leaders. And it is right: Employer-based health-insurance is indeed failing.
Between 2000 and 2007, the percentage of firms offering health insurance benefits fell from 69 percent to 60 percent. The percentage of people under age 65 with employer provided insurance dropped by 68 to 63 percent. In absolute numbers, those covered by job-based insurance fell from 179.4 million to 177.2 million.
Employers are jettisoning health insurance because costs are out of control. Since 2001, premiums for family coverage have increased 78 percent, while wages have gone up 19 percent and inflation is up 17 percent. The consequence is that health insurance is the number one domestic policy issue in the 2008 presidential race.
So what is the CED's prescription for our ailing health insurance system? The report promisingly begins by recommending the creation of "a system of market-based universal health insurance." In order to achieve this, the CED would make health insurance mandatory for every American.
The CED proposal envisions the creation of independent regional exchanges that would act as a single point of entry for each individual to choose among competing private health plans. The exchanges would set minimum benefit plans. The exchanges would also cut through the thickets of state health insurance regulations that add substantially to the costs of insurance. Individuals could purchase insurance above and beyond the minimum benefit plans with after tax dollars.
Insurers would be required to take all individuals regardless of prior medical conditions. In order to prevent adverse selection spirals, the exchanges would also do risk-adjustments by transferring some of the premium revenue from insurers that had enrolled more good risks to those who enrolled more poor risks. Consumers pay a price an insurer would receive had it enrolled an average population of risks. Something very similar is already done in Switzerland's mandatory private health insurance market.
So far, so good.
Unfortunately, the CED proposals go quickly off the rails when the group recommends that every household receive a fixed-dollar credit sufficient to purchase an approved low-priced quality health plan. This health insurance credit would not be means tested and would be financed by some kind of broadly based tax—perhaps a payroll, value-added or environmental tax. Such taxes, like Social Security and Medicare payroll taxes, are likely to be regressive, which means the poor will pay a larger percentage of their incomes than the rich. In fact, two-thirds of taxpayers paid more in social security and Medicare taxes than they did income taxes.
For example, today every wage-earning American pays a Medicare payroll tax of 2.9 percent. That tax is supposedly divided so that employees and employers each pay 1.45 percent. Of course, employers would give employees the other 1.45 percent if they were not paying the tax, so in reality the employees are paying the whole tax. The same thing goes for the Social Security Ponzi scheme.
The CED proposal is chiefly a ploy to get employers out from under the increasingly heavy burden of buying insurance for their employees. That's a laudatory goal, but it shouldn't be done by imposing yet another tax on employees. The good part of the CED proposal is that employees would purchase private health insurance in a competitive market. If households could find a policy for cheaper than the credit, they could pocket the extra money for themselves. The CED argues persuasively that this kind of competition would tend to keep health care costs down.
But why advocate a tax to pay for the credits? One advantage of such a health insurance credit is that it would avoid the administrative and enforcement costs of coercing people to buy insurance. Such enforcement has proved problematic in other insurance markets. For example, although auto insurance is mandatory, more than 14 percent of motorists are uninsured.
However, there is a better way to expand private health insurance and to obtain the benefits of competition as a way to keep medical spending down. First, retain the CED proposal that health insurance be mandatory. But, instead of a new tax, allow employers to hand over the money they currently spend on health insurance to their employees in the form of money wages. Then, in order to create a level playing field, expand the current tax exemption for employer-purchased health benefits to all individuals. Maintaining the tax exemption helps enforce the mandate because taxpayers will have to report annually how much they paid for their health insurance when they pay their taxes.
What about the poor Americans who do not make enough to afford medical insurance? Give them vouchers to buy private medical insurance and pay for the vouchers by abolishing Medicaid. In 2005, the Federal government and the states spent $316 billion on Medicaid to cover around 17 million households. That works out to about $18,500 per household per year. The annual premium for family coverage in 2007 averaged just over $12,000. Due to increased competition, average premiums for the minimum private plans will drop. This means that some money should be left over from Medicare to pay for the currently uninsured poor. There will be some administrative costs involved with determining voucher eligibility, but the health insurance vouchers themselves would essentially be self-enforcing. The experience of Switzerland, in which nearly one-third of the population receives subsidies to purchase private insurance, suggests that very few would fall through the new health insurance safety net.
Despite its flaws, the CED proposal avoids the huge mistake of centralizing health insurance through a single government bureaucracy. The CED report correctly concludes that "Market-based universal health insurance, with individuals choosing the health plans and delivery systems that they deem best, shows great promise—much greater than any alternative."
Ronald Bailey is Reason's science correspondent. His most recent book, Liberation Biology: The Scientific and Moral Case for the Biotech Revolution, is available from Prometheus Books.