How employer-provided healthcare is strangling consumers

Americans’ extravagant spending on healthcare puts them rather famously in a league of their own. 

The numbers hardly bear repeating, but the Centers for Medicare and Medicaid Services now project that healthcare spending for 2016 totaled almost 3.4 trillion dollars, up almost five points in just one year. 

{mosads}And, as a new survey from the Kaiser Family Foundation shows, healthcare consumers—which group now, in theory, means everyone—are struggling with the high costs of care. More than one in three Americans now say that they have difficulty affording their healthcare premiums, and almost half say that it would be difficult to manage an unexpected $500 medical bill. The Affordable Care Act seems to have made healthcare less affordable.

Any meaningful reform, then, must go to the heart of the matter, confronting the surging healthcare costs that CMS predicts will be about one-fifth of GDP by 2025.

That a state of affairs obtains imparts to it a sense of inevitability, an impression that it must always have obtained and always will. Associated with this way of thinking is what psychologists call “existence bias,” the idea that something is good or has value for no reason other than that it is already a part of the existing order of things. 

This mistake, along with other similar biases (the naturalistic fallacy, status quo bias, and longevity bias, to name a few), informs people’s thinking about politics and issues like healthcare policy. Today, it’s hard to imagine health insurance markets without corporate employers as the predominant purchasers. But it is not at all obvious that employers ought to provide health insurance as a benefit, or that such a system would have materialized (particularly on such a scale) were it not for the harmful wage controls of the World War II era. 

The story has become familiar: employers, looking for an end run around compensation limits, turned to other benefits like health insurance. Coupled with the IRS’s favorable treatment (codified in 1954, but already in force), employer-provided insurance came to be the dominant model for the provision of healthcare goods and services. According to the Kaiser Family Foundation, in 2014, two-thirds of the non-elderly workforce were offered health insurance coverage through their employers; the same year, 56 percent of non-elderly Americans were in fact covered by an employer-sponsored plan. And these figures are down from their peaks in 1980, when 71.4 percent of non-elderly Americans were covered through their employers.

This employer-provided health insurance, the primary mechanism through which most Americans receive their coverage, is among the principal sources of the cost problem. As Nobel laureate Milton Friedman observed, “[N]obody spends somebody else’s money as wisely or as frugally as he spends his own.” 

Friedman remarked astutely on the similarity between employer-provided medical care and “the much-reviled company store,” the infamy of which was a product of its bargaining power advantage over the hapless workers who were its customers. Because they were practically free of competition and employees were often paid in store credits, these stores could charge higher prices; funneled through their doors, workers frequently fell deep into company stores’ debt. Like the unique position of the company store, the fact that an employer provides one’s health insurance gives it an enormous power over her life and decisions. 

As Cato Institute Senior Fellow Michael Tanner noted, discussing the Hobby Lobby case, employer-provided insurance is insidious in that it “gives your boss the power to determine what is and is not included in your insurance plan.”

It would be one thing if this kind of power were the result of a freely undertaken bargain — free, that is, from pernicious government manipulation. But the government, as noted, systematically favors the system of health insurance as a benefit of employment.

The argument that the tax code should stop favoring employer-provided health insurance is not necessarily to suggest that there should be no special tax treatment to encourage individuals to obtain insurance and to aid them financially in doing so. 

Rather, any tax advantages ought to return decision-making power to the individual consumer, to support choice in a competitive and dynamic market. More directly responsible for the costs of their plans, individuals will naturally be more prudent in their healthcare spending, more discerning in their search for plans tailored to their specific needs. 

The best way to protect consumers from unsafe practices and pharmaceuticals is not to promulgate an endless series of abortive, paternalistic new rules — susceptible to gaming by incumbent interest — but to simply allow competition.

While this may seem glaringly obvious, genuine free-market competition in healthcare would be a radical change. The current U.S. healthcare system is suffocating under an impossibly convoluted complex of subsidies, licenses, prohibitions, certificate of need laws, and other anti-competitive privileges.

Today, federal healthcare law in the form of the misnamed Affordable Care Act outlaws most of the innovative plans for which consumers are so desperately calling out; it instead forces them to buy expensive insurance, often brimful with coverage features they don’t need, thus fanning the flames of the cost crisis. 

As wrote the English political philosopher and parliamentarian Auberon Herbert, “[I]t is only the unfit things which require force for their establishment and maintenance.” Healthcare reform must address soaring costs by refocusing itself on the individual and on nurturing robust competition in the industry. 

The system of third-party payment, which currently entails enormously expensive bureaucratic overhead costs, would begin to give way to a wide variety of options, the inevitable result of free experimentation — of entrepreneurs looking for their niche in an unconstrained marketplace with, for the first time, a level playing field.

David D’Amato, an adjunct law professor at DePaul University, is a policy advisor at the Heartland Institute.

The views expressed by contributors are their own and are not the views of The Hill.