Improve American Health Care by Moving Away From Employer-Sponsored Insurance

Health care financed by insurance represents a major portion of the economy in America,¹ and more than half of people with insurance are covered by their employer.² For employers, approximately 30% of employee expenses go to benefits, of which health insurance is the largest component.³ Collectively, this is more than $1 trillion a year in employer-sponsored insurance (ESI) expenses.¹ The major problem with this is that ESI leads to lower-quality, higher-cost health care while hurting the employer’s productivity. In this perspective, I build the case that ESI should end in the US.

Employers Do a Poor Job of Managing Health Care Costs

The reason that employers provide health insurance is an accident of history. During World War II, labor shortages led to a wage freeze, but the Internal Revenue Service ruled that health care benefits were not subject to that freeze, allowing employers to entice employees with these benefits. Subsequently, this ruling was solidified with legislation in which employer-sponsored benefits were given tax preferences.⁴ Several generations later, health insurance is expected by many employees, and large employers are required to offer it.⁵

This reliance on ESI is not the only way care can be provided. Most countries do not rely on ESI,^6,7 and the US does not need to. In Belgium, for example, many people receive a car as part of their employment benefit because it is tax advantaged,^8,9 and it has become part of the expectation of senior employees. However, few in the US would argue that employer-sponsored vehicles are ideal because people should be able to choose and purchase their own car and keep it when they move jobs. The same approach can apply to ESI.

Employer-provided health insurance is a poor option because providing health insurance hurts productivity and is a distraction, employers do a poor job of providing it, and the ESI tax benefit leads to inefficiencies in the market.

Very few employers are in the business of managing populations and providing medical care, despite taking full risk for the health care costs of many of their employees.¹⁰ This means that employers need to be experts in both their primary industry and the management of health care benefits, including designing programs and procedures to help people stay healthy. In business circles, this leads to the concept of the diversification discount or conglomerate discount, in which a firm that overly diversifies is valued less than the sum of its parts.¹¹ This discount occurs because rarely are those best positioned to run one business also the best options to run an unrelated business. For employers, a leadership team that is professionally qualified to run a manufacturing, service, or retail company is very unlikely to also have the skills to effectively run a health care company. To optimize health outcomes, value-based arrangements built around their population’s needs are key, but the employers are not well positioned to design or implement these and, if they do seek to implement them, they are often a distraction from whatever the core business may be. America will be more efficient if its business leaders can shift their focus to their core competencies and away from moonlighting as health care professionals.

Employers also do a poor job of delivering health care benefits. Investments in health via worksite health promotion programs do not tend to save money12 and have very low uptake.¹³ Employers are not well positioned to negotiate lower rates¹⁴ and often pay at the top of the market for care.¹⁵ Their inability to provide value (both in terms of quality and lower rates) may open them to legal liability as a breach of their fiduciary duty.^16,17

Because of this, ESI costs are growing faster than inflation¹⁸ and health care costs represent a major concern for employers.¹⁹ Concurrently, employees often do not want providers to have their health data,²⁰ leading to privacy concerns.²¹ These failures are not a case of the fox guarding the henhouse (ie, nothing malicious) but more like trying to have the scarecrow guard the henhouse—employers are poorly positioned to manage costs and not the right organizations to focus on health.

Finally, ESI can lead to broader market distortions. These include job lock, in which people are reluctant to move jobs because they would lose health benefits,²² and income inequality because the tax benefits associated with ESI disproportionately accrue to wealthy workers^23,24 and may also lead to higher health care costs.²⁵ These market distortions risk harm to the workers and also threaten the international economic might of the US.²⁶

ESI, although it has for generations been the primary method of obtaining health insurance, is no longer tenable. It is a distraction to companies, is poorly executed, and leads to external market distortions. I join other voices^23,25,27 that have recommended an end to the tax exclusion for ESI but also recommend policy recommendations to proactively stop employers from offering this benefit.

Ending ESI

The simplest way to limit the growth and likely shrink ESI is by limiting the tax benefits that accrue through it and ending the mandate for large employers to offer insurance. If ESI expenses were taxed and there was no mandate to cover insurance, employers would begin to view health care costs even more negatively because of their increased expense. Because there would be no benefit to taking a portion of salary in the form of benefits, many employees would choose higher salaries and then buy lower-cost plans elsewhere. Importantly, employees who would otherwise be eligible for health insurance subsidies would be actively incentivized to seek health insurance from the exchanges or other sources where they could receive additional benefits, and these could be enhanced by allocating some of the new tax revenue that comes from the newly taxable benefits toward exchange subsidies. Over time, many employees would likely begin to move away from ESI, and many employers would also stop offering insurance, pushing all their employees to other forms of insurance (such as health insurance exchanges).

Eliminating the ESI tax exclusion and mandate would help reduce ESI, but I do not believe that is sufficient because ESI also hurts companies by distracting leadership and employers are poor at providing those benefits. What I believe is needed is to proactively discourage employers from offering ESI so employees move to exchanges by (1) taxing ESI at higher levels, (2) increasing reporting requirements for employer-based plans, and (3) discouraging insurers from offering employer-based coverage.

First, if the ESI tax benefit is removed, then ESI will already be taxed, but that may not be sufficient as the tax consequences would be equivalent for ESI or exchange-based insurance for all employees who do not qualify for exchange subsidies. This could be altered by adding an additional tax on benefits that are provided through an employer beyond a relatively low amount. For example, if the limit is $5000 in ESI benefits per year per employee, any amount incurred by the employer above this amount would be taxed at the regular rate plus an additional percentage (perhaps 2%). By actively disincentivizing ESI benefits, more employers would stop offering these benefits and instead offer higher salaries, and more employees would elect to move away from ESI.

A second approach to discourage ESI is to increase the reporting requirements under the Employee Retirement Income Security Act of 1974 (ERISA) and require employers to provide evidence of how they are providing better benefits than their employees could obtain elsewhere. This could require an employee population assessment, quantitative evidence of how the population’s needs are being met, and how rates are being negotiated to ensure that the employer is acting as a good fiduciary of the employees’ money. For employers that feel that offering ESI is a differentiator and that they can provide better care than is available elsewhere in the market, this reporting will validate that belief. For employers that do not feel that they can differentiate in this space, the reporting burden will encourage them to abandon ESI because it will lead them to risk failing as fiduciaries.^16,17 Union employees who have health benefits can similarly elect to remain under a union-based plan if they believe it truly provides better health care than other options, or they can elect to receive higher salaries and purchase their coverage on the exchanges (likely with subsidies).

Finally, many employers will stop offering ESI if there are no viable market offerings available to them. This can be achieved by providing disincentives for insurers to offer employer-based coverage such as higher taxes, disallowing the ability to operate both group plans and Medicare Advantage or individual market plans, or requiring enhanced group-level reporting under ERISA.

To fully achieve this, congressional action will be needed to change the tax code. Although that will take time, executive branch leadership can begin to prepare the way for this by conducting studies and estimates to show how ESI is failing the American workforce. As mounting evidence shows the global disadvantage that ESI is for companies, ground support for the needed congressional legislation will begin to form.

Conclusions

ESI has led to suboptimal care because it tasks employers with managing health in a way that they are not prepared to do. The result has been higher costs, lower quality, unnecessary challenges for employers, market distortions, job lock, and loss of general tax revenue. It is time to end ESI and separate insurance from employment in America. After 80 years of ESI, eliminating it will take time, so now is the time to start.

Author Information

Dr Muhlestein is the founder and CEO of Simple Healthcare in Orlando, Florida, and is a member of the editorial board of Population Health, Equity & Outcomes.

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