Why Employer-Based Health Insurance Is Bad

(This is in large part derived from my thoughts during an email discussion with the CLIMBfolk – primarily Jeff and Andrew)

I remember reading a story a while ago lamenting how a woman with some terminal illness (might have been lung cancer) couldn’t get reasonable health insurance.  I was astounded by how ridiculous it was to think that anyone would insure someone who was guaranteed to rack up medical costs.  Now, the problem in this particular case was that she had been forced to quit her job and she had health insurance from her job.  This obviously causes a problem, because now she’s uninsured and has what amounts to a previous medical condition which precludes her from getting insurance going forwards.

The solution, then, is to decouple health insurance from employers.  Make it so people can retain their health insurance even if they lose their jobs.  It’s well-established in economics that benefits come out of wages rather than profits; you decouple the two, wages will go up so employees can afford private health insurance.  If the government should do anything at all, it’s that they should disincentivize employer-provided health insurance.  It was FDR who got the ball rolling on this entire mess – back in 1942 he freezed wage increases at companies, but allowed benefits packages.  He also didn’t tax employee benefit packages.  So employers offered benefit packages instead of wages and they gradually became standard.

To repeat: employer-provided health insurance is bad for workers, because when they lose their job, they lose their insurance.  When they lose their job due to medical reasons, they’re screwed.  The ability to keep your health insurance should be independent of your health – that is precisely the point of insurance to begin with.  Instead, employer-provided health insurance screws you over when you truly need it.  It might have been fine for an era in which the treatment for severe illness was basically a coffin.  Now, it’s not.

To decouple employers and health insurance, all you have to do is tax employer-provided benefits, decrease the payroll tax, and you’re all set.   What will happen over time is that employers will start paying employees more and giving them less health benefits.  Then, these employees can go buy private plans which are not only better in terms of customization (because if you’re healthy, you don’t subsidize the unhealthy), but are also portable.

(Of course, this is what McCain was trying to do and he got killed for trying to ‘tax benefits’)