Three cheers for employer’s health insurance

The Covid-19 pandemic has put enormous stress on the US workforce. Unemployment topped 14 million last spring as businesses and communities shut down. With so many people out of work, you would expect to see an increase in the number of people without health insurance. However, the number of people on employer insurance only decreased by 1% or 2% even though employment fell 20% at one point.

Many employers continued to offer support to workers made redundant during the pandemic. As the economy and the country begin to fully reopen, employer health coverage is back, providing benefits to millions of American families.

Although much maligned, employer-sponsored insurance has enormous value to Americans, taxpayers, and the health care system. One way to quantify the value is to look at how much consumers are willing to pay for their coverage, which is at least what they are paying in premiums, otherwise they wouldn’t have purchased the coverage, but could be higher.

Health economists have observed that many, but not all, consumers buy coverage even when health insurance becomes more expensive. Those who still buy at higher prices show a particularly strong willingness to pay. It is the “principle of revealed preference”, which, as a long-standing federal focus the said, should carry a lot of weight in the evaluation of policies “because the preference data revealed is based on real decisions, where market players appreciate or suffer the consequences of their decisions”.

In an analysis of revealed preferences published by the National Bureau of Economic Research, I find that employers and employees together value employer-sponsored insurance 75-84% above what they pay for it. For them, it’s an annual surplus of $ 800 billion.

This is not to mention the cost to taxpayers of the well-known exclusion of employer health insurance premiums from taxable income, which reduces tax and social revenues. On the other hand, the employers’ system encourages work and business creation, which adds to tax revenue. Based on studies of tax revenue published by the Congressional Budget Office and the White House Council of Economic Advisers, I estimate that tax exclusion represents an annual cost of around $ 200 billion, while the effects on labor and business creation, along with increased insurance coverage and reduced subsidies paid through ObamaCare and Medicaid, represent an additional social benefit of $ 900 billion per year.

Together, all of these benefits and costs add up to an annual net benefit of $ 1.5 trillion. That’s almost $ 10,000 for each insured person. From covering 160 million Americans to encouraging work that stimulates the economy, this value justifies more than the dominant mode of health insurance in the United States.

These numbers tell a different story than what you’re probably used to hearing, which is that the employer system is a holdover from WWII. Critics argue that the employer’s system costs more than it is worth, citing Medicare’s tax exemption. Some healthcare advocates say removing the tax exemption would divert funds to subsidize the ObamaCare trade-in plans. This view overlooks the high demand for employer insurance and its true value, which far exceeds the tax subsidy and cannot be replicated in the personal market.

Employer coverage would pass the market test even without special tax treatment. Healthcare providers often wield market power to support price increases, hampering competition with notorious “certificate of need” laws, for example. Employers ‘plans function like buyers’ clubs, driving down the prices of suppliers, medical providers.

Think about Costco.

Costco members may not have a particularly elastic demand for specific brands of jeans, for example. Jeans manufacturers could take advantage of this and raise prices when dealing with individual consumers. Costco, however, limits the number of manufacturers that can sell to its members to the few that offer good products at the lowest prices. Indeed, every manufacturer who bids to be at Costco faces a very elastic demand from the club because a small price increase can start their products entirely from the store. Likewise, employer plans leverage the power of plan members to achieve cost savings, functioning as a competitive force in consolidated supplier networks.

In addition, employer coverage links work with the opportunity to enjoy high-quality, valuable health coverage. Employment produces important social benefits not only for individuals, but also for communities. Researchers ranging from Michael Sandel to Charles Murray have documented the damage to communities caused by a lack of work and the positive effects of work on social capital, family formation, and mental health — the extent of which I have not estimated. social value, although that would add to the $ 1.5 trillion.

Alternatives to employer-provided health insurance (individual plans, government plans, and no insurance) often involve more government subsidies and cannot replicate much of the value of employer coverage. Employer-provided insurance is the backbone of American health care. It should stay that way.

Mr. Mulligan, professor of economics at the University of Chicago, was chief economist on the White House Council of Economic Advisers, 2018-19.

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