Employer-based health insurance plans no longer work

It seems clear that change is coming to the U.S. healthcare system. President-elect Barack Obama wants it. Congress wants it. Even the insurance industry says the time is ripe to do things differently.

But not too differently. The idea of doing away with the employer-based insurance system -- which has become increasingly unsustainable for businesses and has resulted in 47 million Americans going without coverage -- seems to be off the table.

“There are very few economists who say that if they were king, the employer-based system is the one they would pick,” said Henry Aaron, a senior fellow at the Brookings Institution who specializes in healthcare.

Uninsured: David Lazarus’ column in Business on Wednesday, about the idea of doing away with the employer-based insurance system, reported that 47 million Americans lacked health insurance. As of last year, the total number of uninsured was 45.7 million, which includes both citizens and noncitizens. —

“The problem is that it’s not possible to just walk away from the employer-based system. The 180 million people who currently receive coverage from employers would go ballistic.”

In other words, the crappy insurance system you know is better than the newfangled system you don’t.


This seems like a lame reason to remain wedded to a system that, by and large, fails to serve the interests of both the American people and U.S. businesses.

According to the Organization for Economic Cooperation and Development, the $6,102 spent per person on healthcare in the United States in 2004 was nearly twice the amount than in most other industrialized democracies and well beyond the average $2,660 of the organization’s 30 member nations.

At the same time, the average life expectancy in the United States was shorter (77.5 years) and the infant mortality rate higher (6.9 deaths per 1,000 births) than elsewhere in the developed world.

Clearly we’re not getting a lot of bang for our healthcare bucks.


Employer-based health coverage is a historical accident. Businesses began offering it during World War II to attract workers during a government-imposed wage freeze, and the benefit gradually became the primary form of health insurance.

Many large employers now bellyache about healthcare costs. During recent bailout hearings, the Big Three automakers said their Japanese counterparts enjoyed a competitive advantage because workers’ health insurance was provided by the government.

Yet U.S. businesses have been reluctant to call for radical change in the insurance system.

“Our membership is overwhelmingly in favor of retaining the current employer-based healthcare system,” said Anthony Wisniewski, executive director of healthcare policy for the U.S. Chamber of Commerce. “By having an employer-based system, employers can make offerings that allow them to attract the most talented people to their organizations.”


That sounds nice in theory. In practice, employers are increasingly opting for cheaper insurance plans with higher deductibles and co-pays, thus saddling workers with a greater share of costs.

According to the Kaiser Family Foundation, 18% of all covered workers now face annual deductibles of at least $1,000, up from 12% in 2007. Among smaller businesses with up to 200 employees, more than a third of workers have deductibles of at least $1,000, up from 21% last year.

I’ve long believed that something along the lines of expanding Medicare to cover all Americans, not just the elderly and disabled, would be the most effective way of providing insurance to everyone and controlling healthcare costs.

But that’s not going to happen any time soon, not if the insurance industry has anything to say about it.


An industry trade group recently unveiled a plan for universal coverage that includes requiring all uninsured Americans to buy policies from private insurers. For their part, the insurers would agree to stop rejecting people with preexisting conditions.

But anyone who’s ever shopped for coverage in the individual insurance market knows that such policies don’t come cheap, and the only way to keep costs down is to take on sky-high deductibles.

Pauline Rosenau, a health professor at the University of Texas, says the U.S. should be looking to the Netherlands for guidance -- about what to do and what not to do.

Until 2006, the Dutch combined employer-based coverage with individual policies as well as a government-administered insurance program. This became unwieldy and inefficient.


The Dutch introduced a system two years ago that did away with employer-based plans and government insurance, replacing them with a mandate that everyone buy individual policies.

At the same time, the government said it would play a more active role in keeping prices competitive and thus prevent individual policies from soaring in cost.

“They have a very, very highly regulated system,” Rosenau said. “Private insurers have to sell to anyone who wants it, and they have to sell at the same price that they sell to everyone else in a certain geographic area.”

She said Dutch insurers supported the change, liking the idea of mandates and no longer having to compete with a government insurance program. Since the new system was adopted, insurance firms have vigorously competed for market share by keeping prices low -- just as the government intended.


What wasn’t intended was that most insurers would consistently lose money on basic policies, although some have managed to recoup cash by offering supplemental insurance to those who desire it.

“We can avoid their mistakes,” Rosenau said. “We need to create a system that allows insurers enough freedom to operate, but at the same time regulates them so they compete on price, not on being able to avoid the very sick.”

What’s clear is that our own reform efforts should begin without preconditions. The employer-based system isn’t our only choice, and we should be open to alternatives (while ensuring that whatever’s taken away from workers in terms of an insurance benefit is returned in the form of extra pay or tax credits to cover new expenses).

Ours isn’t the only country to face the challenge of offering universal coverage while also reining in healthcare costs. The conversation needs to begin with what’s in the best interests of the American people and the best interests of U.S. businesses.


If we’re honest with ourselves, I think we’ll see that reform can mean healthy change, not just more of the same.

David Lazarus’ column runs Wednesdays and Sundays. Send your tips or feedback to