Shawn Tully provides some interesting proposals to reform health care in this country in an article published by Fortune Magazine on-line this week. His proposals involve taking a market based approach to reform. Here are some highlights:
- Eliminate the tax break provided to employees who get health care through their employer.
- Encourage employers to stop offering health coverage altogether and, instead, increase employee wages by an amount equal to what they pay on behalf of employees for that coverage.
- Give tax breaks directly to consumers to purchase health insurance on their own.
- Promote high deductible health plans (or other consumer focused coverage) for consumers on the open market so that consumers of health care begin acting just like that: consumers.
- Deregulate the “three big inflators” of health care costs: the standard benefits package, community rating, and guaranteed issue.
- Permit consumers to purchase health insurance across state lines.
In theory, I agree with Tully. Take the money employers pay for health insurance and give it directly to employees. Give tax breaks directly to consumers to purchase health insurance on their own. Encourage (or incentivize) people to purchase only the health insurance they need and use the remainder of what they don’t spend on insurance itself to cover other health care expenses. And implement reforms that encourage competition and innovation in a free market.
However, I see some issues with this approach. First, I have little confidence that all employers will raise employees’ salaries by an amount equal to what they’re paying for health insurance. Some employers will reduce total compensation to employees by raising salaries by an amount less than what they’re paying for health coverage hoping those employees will simply be appreciative for the nominal salary increase. That said, one can argue that the labor market will correct this in the long term. But there will be some period of time during which employees’ overall compensation may be materially reduced.
Second, employees don’t know how to buy health insurance on their own. For sixty years, employers in the US have spoon-fed health insurance to 170 million Americans, who very rarely read their Summary Plan Descriptions. Pushing this responsibility to employees will, no doubt, result in analysis paralysis on the part of many consumers. In a worst case scenario, consumers will purchase coverage that is far too rich or far too poor, simply because they don’t know what they’re buying. And I don’t think that consumers will earmark what they don’t spend on a Cadillac health care policy for other health care expenses. Prior to the current economic situation, Americans showed that, under normal circumstances, they will spend everything they bring in and then some. The personal savings rate in the US was negative 1% in 2006 and negative 0.4% in 2005.
I am supportive of market based solutions to the health care dilemma this country is currently facing. I worry that relying on employers to replace health care benefits with additional compensation will not work out in favor of employees (at least in the near term). I’m not sure that consumers are ready for the responsibility involved in purchasing their own health insurance. (Why do you think universal national health care has the support it does?) I also think that Tully’s proposals work fine in a bubble. But there are too many interests groups (including the insurance industry, unions, employers, local, state, and federal government, etc.) that will throw up innumerable roadblocks to any and all of these proposals. The health care industry makes up one sixth of our national GDP. Navigating the political landscape to implement such market based solutions would be almost as difficult as, well, navigating the political landscape to implement a public option to compete with private health insurers.
Editor's Note - Greg Dagley is a Benefits Consultant for a large multinational employer in Houston, TX. While his company has employees all over the globe, his job keeps him focused on US benefits and spending a lot of his time managing external vendors. Is there any doubt his Excel skills are more advanced than yours?
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