New York Times
How Health Care Hurts Your Paycheck
By REGINA E. HERZLINGER, BARAK D. RICHMAN and RICHARD J. BOXER
NOV. 2, 2016
If there is a coherent theme to this year’s election, it is the growing economic frustration of working Americans. While trade has been the chief scapegoat, a major culprit has received much less attention: the rising cost of health insurance.
Recent news of large price increases for plans on the Affordable Care Act’s insurance exchanges was the latest example of an unsustainable trend. But those exchanges sell insurance to only about 12 million individuals. Most people with private health insurance, about 150 million individuals, receive coverage through employers. And for those people, prices have been rising for years.
A Kaiser Foundation report released in September explained that since 1999, health care premiums for employer-sponsored insurance programs have risen more than three times faster than wages. Today’s workers are paying an average of $18,000 for health insurance that covers fewer services each year, as employers shift costs to their employees through higher deductibles, co-payments and shares of premiums.
Unlike the plans purchased on insurance exchanges, where individuals pay directly for their policies, employers pay for most private health insurance on their employees’ behalf. Economics research suggests that for each dollar an employer spends on an employee’s health insurance premium, roughly one dollar is removed from that person’s take-home pay. But these costs remain hidden. Workers know their take-home pay has stagnated, but they may not attribute that stagnation to health care costs.
Workers have little control over this enormous expense made on their behalf. Most have few, if any, health insurance options and cannot trade dollars spent on insurance for higher take-home pay. They cannot shop around for or economize on what is probably their most expensive annual purchase. In turn, insurers are not pressured to offer more affordable insurance products.
A minor tweak to our tax code could go a long way to bring more choice, affordability and personal control to how workers purchase health insurance. Current law allows individuals to avoid taxes on money spent on insurance premiums only if their employers purchase insurance on their behalf. What if employers transferred to their employees the amount they now spend on coverage and the law allowed employees to deduct that spending from their taxes?
And what if those laws allowed employees to opt not to spend that entire sum on health insurance, but instead take some home as wages? If an employee in a marginal tax bracket of 25 percent were given an $18,000 budget to purchase insurance, but opted for a plan that costs only $14,000, she could take an additional $3,000, post-tax, home to her family.
This slight change would turn the economic tables for the millions of Americans who get health insurance through their employers. Abundant research has shown that low- and middle-income workers have a strong preference for low-cost plans, much more than what their employers currently offer. If workers know they can increase take-home wages by purchasing less expensive insurance, they will demand more insurance options, and insurers are likely to respond. To avoid the chance that cash-strapped families purchase inadequate plans, insurance plans would have to meet the Affordable Care Act’s minimum standards. The law’s requirement to purchase insurance, with penalties for non-purchase, would lessen the possibility that workers would keep all the money rather than buy insurance.
Freeing workers’ choices for insurance would also bring pressures on insurers to create new products that control costs, such as bundling of homeowners, auto and health insurances, or enabling people between 55 and 64 years old to access Medicare. State legislatures would feel similar pressures to adjust regulations to support competitive insurance marketplaces.
Stiffer competition and cost pressures on insurers, in turn, would force providers to offer more efficient care, such as by replacing outpatient and emergency room visits with telemedicine technology.
Our proposal charts a bipartisan path, bolstering the Democratic mandate for universal care working within the Affordable Care Act, while heeding the Republican call for competition and choice. It also presses further than the main presidential candidates. Hillary Clinton proposes reducing the cost of pharmaceuticals, eliminating taxes on high-end policies, improving cost transparency and allowing people over 55 to buy into Medicare. Donald J. Trump, who wants to repeal the Affordable Care Act, calls for creating tax-free health savings accounts and facilitating cross-state competition. Both recommend assorted tax credits. Each of these approaches aims to soften the effects of rising prices. But neither empowers workers to invigorate the marketplace and make prices more competitive.
America has prospered because it has harnessed the power of competitive markets to enable growth, and it is not hyperbole to say that middle-class disaffection threatens the very compact that generated this prosperity. Competitive markets do not merely force companies to act efficiently and produce valuable offerings. In assuring Americans that they can control their budgets and have a voice in their life decisions, they also serve as a reliable counterforce to the economic discontent that has roiled this election season.
Regina E. Herzlinger is a professor of business administration at Harvard University. Barak D. Richman is a professor of law and business administration at Duke University. Richard J. Boxer is a professor at the David Geffen School of Medicine at U.C.L.A.