Employer-Sponsored Health Insurance - Its Effect on Medical Expenses
Originally, employers thought providing tax-free health benefits and paying all incidental medical expenses was a great way to compensate employees, with federal, state and city governments paying about half the bill through hidden tax subsidies. This subsidy was even larger for decision-making executives in high income tax brackets because the marginal federal personal income tax rate for people earning over $135,000/year ranged between 91% and 70% from 1959-1981. By the mid-1970s, employer-sponsored health benefits and/or employer health insurance with virtually no deductibles were almost universal among major employers.
Experts say < 50% of all medical care in the US is supported by good evidence that it works
With third-party employers and government footing the consumer’s medical bill, the medical industry was given free rein to develop thousands of new treatments. Most of these were efficacious treatments, increasing the quality of healthcare across the country.
However, not all treatments were economical. For example, the pharmaceutical industry developed solutions to problems that weren’t previously defined as medical issues (e.g. prescription drugs to allow people to eat unhealthy foods, Mirapex to treat restless leg syndrome sleep disorders, Viagra and Levitra to treat impotence caused by old age, etc.). By classifying these solutions as “prescription drugs” rather than over-the-counter medicines, the industry was able to sell them to patients with other U.S. citizens and/or employers paying a large portion of the cost through the tax subsidy on employer-sponsored health insurance plans.
“The sad truth today is that less than half of all medical care in the United States is supported by good evidence that it works, according to estimates cited by the Congressional Budget Office.” -New York Times Editorial
LASIK provides an interesting Case Study
Of course, most of the thousands of medical solutions developed, such as MRIs, vaccinations, and surgical procedures, work well and greatly improve our medical care. But, because these solutions were also paid for through distant third-party employers, there was little incentive for medical providers to make these solutions more affordable. LASIK eye surgery, which is typically paid for by consumers themselves versus employers, came out in 1997 and competition forced the price from $3,500/eye to $500/eye for a greatly improved product. Meanwhile, the cost of MRIs and other technology-based innovations increased threefold over the same time period where the consumer did not have to pay their own bill.
Healthcare cost rose from $27 billion in 1960 to more than $2.3 trillion in 2007
As a result of these and other problems, U.S. healthcare costs, funded mostly through tax-free employer-sponsored health benefits, rose from $27 billion in 1960 (5% of GDP) to more than $2.3 trillion in 2007 (16% of GDP). Today the cost of employer-sponsored health benefits exceeds profits for many large companies and threatens the viability of major employers. For example, the market value of General Motors dropped 50 percent after the company announced a $60 billion retiree healthcare obligation (They've since switched to an HRA for many employees that reimburses retirees for medicare supplement premiums).
Due to rising costs, some employers and employees have been economically forced to abandon employer-sponsored health benefits entirely. Today, less than 50% of U.S. small businesses offer group health insurance.
Is Consumerism the Solution?
Many U.S. economists today agree that part of the solution to rising medical costs is returning the consumer to paying directly for part of their healthcare. To a degree, most employers have already embraced this concept by having employees pay the first few hundred or thousand dollars of their own medical care—typically by raising their annual deductible, increasing coinsurance, and shifting premium costs to employees for spouses and dependents.
Raising the employee’s annual deductible has proved difficult for employers to implement because:
- Employees expect to receive virtually 100% coverage for medical expenses as part of the benefits of a “good job;”
- Employees have not been financially educated to budget for medical expenses, and get angry at their employer (or carrier) when they incur non-covered medical expenses; and
- Employees typically have to pay up to twice as much “after tax” for medical expenses and health insurance premiums not paid through a qualified employer-sponsored health plan, health savings account or cafeteria plan.
Note: This should not be taken as legal or tax advice.
