April 15, 2024

Economix: The Economics of Privately Sponsored Social Insurance

Today's Economist

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

On March 23, Senator Ron Johnson, Republican of Wisconsin, marked the first anniversary of President Obama’s signing into law of the Affordable Care Act of 2010 by publishing a commentary in The Wall Street Journal, “ObamaCare and Carey’s Heart.”

He began with a touching celebration of the life-saving operation that had been performed some 27 years ago by highly skilled surgeons on the senator’s young daughter, who was born with a serious heart defect. He noted that this undoubtedly expensive operation had been financed by a “run-of-the-mill plan available to every employee of an Oshkosh, Wis., plastics plant.”

His commentary suggests that he views this “free market” approach to financing health care as the foundation of our health system’s remarkable innovations and achievements.

Senator Johnson’s commentary then veered into a sharp broadside aimed at the Affordable Care Act of 2010:

I don’t even want to think what might have happened if she had been born at a time and place where government defined the limits for most insurance policies and set precedents on what would be covered. Would the life-saving procedures that saved her have been deemed cost-effective by policy makers deciding where to spend increasingly scarce tax dollars?

Not surprisingly, this comment elicited much critical commentary, some of it needlessly vehement.

I do not wish to join that a vituperative chorus, because there is much I admire in the senator. He worked hard in his youth to put himself through the University of Minnesota and studied at night for a master’s of business administration, and he eventually risked his own money and used his vision and even harder work as an entrepreneur to please customers worldwide and, in the process, create a good livelihood for his family and for his employees. I look up to such entrepreneurs. We all should.

Even so, I am puzzled about why the senator does not see in the Affordable Care Act a sincere attempt to replicate his family’s fine health care experience for millions of low-income, uninsured Americans.

The idea is to help those with family incomes above 133 percent of the federal poverty level (currently about $30,000 for a family of four) procure — on an organized state- or federally run health-insurance exchange — community-rated, publicly subsidized, private health insurance of the sort that financed his daughter’s cure.

A government-run health insurance exchange is not such a novel idea, nor should it be controversial. The federal government’s Office of Personnel Management has for decades run such an exchange for every member of Congress and for federal employees, and very successfully, by all accounts.

To see why the Affordable Care Act is actually trying to mimic employment-based private health insurance, let me propose this definition: Employment-based group health insurance, American style, is publicly subsidized, privately sponsored, community-rated social insurance sold to American employees on formally organized health insurance exchanges.

Let me explain how I come to this definition.

First, economists are virtually unanimous that the bulk of the cost of fringe benefits –- including health insurance –- that is ostensibly covered by an employer is actually taken out of the paychecks of employees collectively, if not year by year then in the long run. Exactly what fraction of the cost is shifted back to employees in this way depends on a number of factors.

As I jokingly put it to my students, employee-benefit managers, basically kindly social workers camouflaged in business attire, are similar to pickpockets who take money out of your paychecks and then use it to buy you health insurance, for which you thank them profusely.

In other words, the employees actually pay most or the full premiums for their employment-based health insurance, even if they do not make an overt contribution toward the insurance premium.

Second, to assist employees in making this purchase, the benefit managers organize a formal health-insurance exchange that lists a side-by-side comparison of the different insurers among which employees can choose.

While there are some variations in the benefit packages offered by the various insurance companies on the list, the packages are typically dictated by the employee-benefit department, which also selects the health insurance plans permitted to list themselves on the exchange (and those that are not) and tightly regulates these companies’ behavior during and after the enrollment period.

Of course, smaller companies usually list fewer and sometimes only one or two insurers on their exchanges. Part of the intent of the Affordable Care Act is to offer these small employers access to the larger state-run exchanges, so their employees have more choices among insurers.

Third, the contributions employees make directly toward the premium for health insurance (through explicit deduction from their paychecks), plus their indirect contribution through reductions in take-home pay, are effectively community rated. This means healthier employees are forced to subsidize through their premiums the health care of sicker employees by effectively paying the same premiums.

Consider two workers performing the same work in a company, one healthy and the other chronically sick. They will make the same direct contribution to the identical insurance policy and receive the same take-home pay.

In other words, the idea that raised so many hackles last year — that younger, healthier Americans should, through community-rated health-insurance premiums, subsidize sicker Americans — has long been accepted by the bulk of Americans at their place of work.

In this sense, then, private employment-based group insurance qualifies for the label of “social insurance,” even though it is privately sponsored. It is, of course, not socialized medicine, but neither are the Medicare, Medicaid and Tricare programs, government-sponsored social insurance programs that procure health care from the private sector.

Only the program that Americans reserve for military veterans, and apparently preferred by them — the vast Veterans Administration Health System — is pure socialized medicine.

Finally, Americans who procure health insurance at their place of work receive generous public subsidies toward that purchase, and higher-income earners receive larger subsidies than lower-income earners. This is so because the contributions employers make toward the group health-insurance premiums of their employees are tax-deductible business expenses, but not taxable compensation to the employee — even though it is a form of compensation.

Estimates of the total dollar amount of that subsidy range between $200 billion and $300 billion a year, depending on what taxes are included in the analysis – only federal income taxes, or also payroll taxes, or also state income taxes, if any. Estimates consistently show that high-income earners receive the bulk of that public subsidy.

The current amount of that subsidy is estimated at around $200 billion a year, although some estimates go higher, depending on what taxes are included in the analysis –- only federal income taxes, or also payroll taxes, or also state income taxes, if any.

Estimates consistently show that high-income earners in high marginal tax brackets receive the bulk of that public subsidy.

Having said all this, I ask you to imagine a low-income family whose head or heads of household work at very low wages in small companies that do not offer their employees health insurance, which is the case at many small companies. Suppose their little daughter was born with exactly the same condition as was Senator Johnson’s daughter. What should the fate of that little girl be?

Perhaps the senator could provide some commentary on that, as well.

Article source: http://feeds.nytimes.com/click.phdo?i=7e3347057d5befb2195f159224095c3a

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