Friday, March 1, 2013

The Limited Reach of Employer-Based Health Insurance

It's common to describe the U.S. as having employer-based health insurance, and while that statement is broadly true, it doesn't capture the limitations of this approach. Hubert Janicki of the U.S. Census Bureau lays out some of the basic trends and patterns in "Employer-Based Health Insurance: 2010," a February 2013 report. Here are a few facts:

The share of the U.S. population over the age of 15 covered by employment-based health insurance (either by their own employer or as a dependent) has been falling, dropping from 64.4% in 1997 to 56.5% in 2010.

Of the employed, 70.2% have employment based health insurance in 2010, down from 76.2% back in 2002. Of the employed, 18% have no health insurance in 2010, compared with 14.5% of the employed back  in 2002.

In other words, employer-provided health insurance has long fallen short of universal coverage, and it's been getting skimpier over the last decade or so. For example, those with lower incomes and those working for smaller firms are less likely to have employer-based health insurance.

"By family income, the likelihood of working for an employer that offers any health insurance benefits increased with family income. Individuals with family incomes less than 138 percent of the federal poverty level were the least likely to work for an employer that offered health insurance benefits.Among these workers, 43.3 percent were employed in firms that offered health insurance benefits. In comparison, 63.9 percent of individuals with family incomes between 139 percent and 250 percent of the federal poverty level worked for such an employer. Among workers with family incomes 251 percent to 400 percent of the federal poverty level, 74.8 percent were employed in firms that offered health insurance benefits. Workers with family incomes 401 percent and above of the federal poverty level were themost likely to work for an employer that offered health benefits (80.9 percent). ...

"Less than one half (45.3 percent) of people working in firms with fewer than 25 employees received health insurance benefits compared with 88.8 percent for people who worked for firms employing 1,000 or more employees ..."
Of course, the limitations of employer-provided health insurance are not sufficient to prove that the Affordable Care Act passed into law in 2009 is a useful solution. Indeed, the looming presence of that act soon to take effect, together with the economic wreckage of the Great Recession, may help to explain the drop-off in employer-provided health insurance in the last few years. But whatever the limitations of that legislation, the shortcomings of employer-provided health insurance are very real.

It's always worth remembering (and I have noted before on this blog) that the predominance of employer-provided health insurance in the U.S. economy is an historical accident. Melissa Thomasson offers a nice overview in "From Sickness to Health: The Twentieth-Century Development of U.S. Health Insurance," in the July 2002 issue of Explorations in Economic History, but that's not freely available on-line. However, Thomasson offers a brief overview at the Economic History Association website here. Thomasson points out that the number of Americans with health insurance went from 15 million in 1940 to 130 million in 1960. Blue Cross/Blue Shield plans began to be established in the 1930s. Then in World War II, the fateful decision was made to encourage employers to provide health insurance, and not to tax individuals on the value of that health insurance they received. Here's Thomasson:

"During World War II, wage and price controls prevented employers from using wages to compete for scarce labor. Under the 1942 Stabilization Act, Congress limited the wage increases that could be offered by firms, but permitted the adoption of employee insurance plans. In this way, health benefit packages offered one means of securing workers. ... [I]n 1949, the National Labor Relations Board ruled in a dispute between the Inland Steel Co. and the United Steelworkers Union that the term "wages" included pension and insurance benefits. Therefore, when negotiating for wages, the union was allowed to negotiate benefit packages on behalf of workers as well. This ruling, affirmed later by the U.S. Supreme Court, further reinforced the employment-based system.

"Perhaps the most influential aspect of government intervention that shaped the employer-based system of health insurance was the tax treatment of employer-provided contributions to employee health insurance plans. First, employers did not have to pay payroll tax on their contributions to employee health plans. Further, under certain circumstances, employees did not have to pay income tax on their employer's contributions to their health insurance plans. The first such exclusion occurred under an administrative ruling handed down in 1943 which stated that payments made by the employer directly to commercial insurance companies for group medical and hospitalization premiums of employees were not taxable as employee income. While this particular ruling was highly restrictive and limited in its applicability, it was codified and extended in 1954. Under the 1954 Internal Revenue Code (IRC), employer contributions to employee health plans were exempt from employee taxable income. As a result of this tax-advantaged form of compensation, the demand for health insurance further increased throughout the 1950s ..."
If you feed any industry with enormous tax breaks, especially especially an insurance industry that separates both providers and ultimate consumers from facing costs directly, you are likely to get high levels of spending that, on the margin, bring only very slight benefits.