Posted: December 9th, 2014

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this inequitable, inflationary provision at the behest of private employers, which found the arrangement helpful in their quest to make their workers accept more overt

cost sharing for their health care. n Lack of choice. Whatever benefits employees derive from the current paternalistic system, one price they pay is limits on their

choices in the health insurance market. As Stan Jones, Lynn Etheredge, and Larry Lewin reported in 1996, close to half of American employees are offered only one

health plan by their employers. 6 They are in what one may call a private single-payer system. Another quarter or so of employees are offered a choice of only two

health plans. A more recent Kaiser/Commonwealth national survey of health insurance corroborates these estimates.7 This lack of choice makes a mockery of the idea of

“managed competition.” n Lack of privacy. In many instances, the employer-based system gives private employers access to their employees’ medical records.8 It is one

thing to know that a private insurance carrier has information on the most intimate details of one’s life. It is quite another to think that the personnel department

of one’s employer can get access to that information as well. Whatever one may think about health systems abroad, patients in those countries do not worry about this

invasion of privacy. n Administrative complexity. The defenders of employer-based health insurance tend to view it as more “efficient” than alternative arrangements.

That proposition is incredible, given the current system’s administrative complexity. Exhibit 1 illustrates this point. The data there are the fruits of a multiyear

study by McKinsey and Company of the American and German health systems, the latter of which is based on private, not-for-profit sickness funds that operate within a

tight statutory framework.9 The McKinsey research team concluded that the U.S. system is more productively efficient than Germany’s system is. It based that conclusion

on the finding that in

EX HIB IT 1 Decomposition Of Differential Per Capita Health Spending In Germany And The United States, 1990
Per capita spending in Germany Less use of real medical inputs in the United States Plus higher prices in the United States Plus higher administrative costs in the

United States Plus “other” higher costs in the United States Total additional costs per capita in the United States Per capita spending in the United States
SOURCE: McKinsey Global Institute (1996), Exhibit 5. a Purchasing power parity.

$1,473 –390 737 360 259 966 2,439

100.0% –26.5 50.0 24.4 17.6 65.6 165.6

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“If properly managed competition is ever to develop in this country, chances are that Medicare will have to lead the way.”
1990 Germans actually spent $390 more per capita on strictly medical inputs (hospital days, physician visits, drugs, and the like) than did Americans. As the exhibit

shows, however, the U.S. system burned up more than the entire savings from its allegedly superior clinical productivity on higher administrative expenses ($360 per

capita) and on higher outlays on the catch-all category “other” ($259). Because Medicare and Medicaid are known to spend relatively little on administration, the

higher U.S. figure must reflect mainly private insurance. Given that the U.S. system outranks no other system in the industrialized world in either measured health

status indicators or patient satisfaction , it can fairly be asked: In what sense is employer-based health insurance “efficient”? n Lack of transparency. Standard

economic theory and empirical research have convinced economists that the premiums paid by employers on behalf of employees are merely part of the total price of labor

and, over the longer run, are shifted back to employees collectively through commensurate reductions in take-home pay. Unfortunately, it is not known precisely how

employers do this. That may be why employees typically assume that their employer fully absorbs the part of the premium that is not explicitly deducted from their

paycheck. Unaware of how much their health insurance actually costs them in terms of forgone take-home pay, employed Americans have never showed nearly enough self-

interest in health care cost containment. This may explain why over the long run the employer-based system has so frequently acted as the inflationary locomotive in

American health care.

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Ambiguous Entries
To my mind, the previous entries were clear-cut debits or credits. There remain a number of items whose proper entry into the employer-based system’s account is more

ambiguous. n Health spending. It seems to be widely taken as an axiom that private health insurers are always more successful than the public sector is at cost control

in health care. This hypothesis does find support in the period 1992–1997, when the national average of the health insurance premiums paid under the employer-based

system did rise less rapidly than per capita health spending in the public sector. Therefore, one might be tempted to credit the employerbased system with superior

cost control.
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As is well known among analysts familiar with the national health accounts, however, the private insurance sector has not consistently outperformed the public sector

in this regard. For example, during most of the 1980s premiums in the private sector rose much more rapidly than did Medicare spending per enrollee. That is true again

today and for the foreseeable future. From a long-run perspective, the fairest statement is that in some periods the private insurance sector seems more able to

control the growth of health spending, while in other periods the public sector has been more successful. n Managed competition. At the beginning of the decade

Americans looked to employer-based health insurance as the spearhead of “managed competition.” That arrangement requires individual households to choose from a menu of

rival health plans the one plan that will subsequently regulate (manage) the health care received by family members in case of illness. Such a daunting choice

presupposes an information infrastructure capable of informing households about (1) the manner in which the rival health plans regulate health care in case of illness,

and (2) the quality of the services rendered by the providers of health care with which the health plans contract for services. Only a few employers provide workers

with such information. Even the roughly 50 percent of Americans whose employer actually does offer them a choice among health plans are given only sketchy information

on the plans and usually none on the quality of the providers of health care associated with them. For example, in the HMO Performance Report of the 1997 Benefits

Decision Workbook for its New Jersey employees, the Xerox Corporation, which is generally thought of as one of the most sophisticated buyers of health insurance, noted

that neither the Oxford Health Plan nor its competitor, U.S. Healthcare, permitted dissemination of a variety of crucial performance data to Xerox employees, including

the board certifications of physicians and enrollee satisfaction .10 As Etheredge has concluded (and I concur), if properly managed competition is ever to develop in

this country, chances are that Medicare will have to lead the way.11 n The NCQA. The employer-based system can claim credit for having created jointly with the managed

care industry the National Committee for Quality Assurance (NCQA), which in turn has developed the Health Plan Employer Data and Information Set (HEDIS). HEDIS

certainly represents a major contribution to the science of measuring and monitoring the quality in health care. The NCQA has contributed further to quality control

through its accreditation of health plans.

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Remarkably, however, a national survey in 1997 revealed that only 9 percent of employers made NCQA accreditation a requirement for including a health plan on their

offering to employees. Only 1 percent of employers provides HEDIS data to employees to assist them in plan selection.12 Although interest in the data may have grown

since that survey, this sluggish uptake by employers speaks poorly of the entire enterprise. Perhaps the intended users of the HEDIS data question their validity,

because the modus operandi of the NCQA represents a classic application of Nobel-laureate economist George Stigler’s now famous “capture theory.” According to that

theory, those who are to be regulated by a public body eventually capture the regulatory apparatus. Because the NCQA started as a joint effort between employers and

health plans, a certain degree of capture by the health plans was guaranteed at the outset. Not surprisingly, then, participation in the NCQA has remained voluntary on

the part of health plans. Furthermore, plans that do submit data to the NCQA can prohibit their dissemination to the public. Finally, all of the HEDIS data, including

those on enrollee satisfaction , are self-reported by plans rather than retrieved by a process not under plans’ control.13 At the very least, employers should have

formed and funded a coalition that surveys enrolled consumers externally.14 One could debate whether, on balance, the NCQA has been a catalyst or a hindrance in the

evolution of managed competition so far. Sometimes a half-hearted effort is worse than none, because its presence precludes or retards the development of superior

approaches. In any event, it is not clear how much if any credit is due the employer-based system for establishing the NCQA’s halfhearted effort at quality control.

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A

lt ho ug h di ff er e nt e va lu at o rs may come up with different debits, credits, and account balances for the employerbased health insurance system, I conclude

from the exercise that the debits outweigh the credits. This conclusion does not call for the outright abolition of the current system, but it does suggest the need

for a parallel system that would be detached from the workplace and that might, over time, absorb the bulk of the current system. With a proper regulatory framework,

such a parallel system need not be public; it could rely on private insurance as well.

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NOTES
1. Kaiser/Commonwealth 1997 National Survey of Health Insurance, “Working Families at Risk: Coverage, Access, Costs, and Worries” (8 December 1997), 40. 2. U.E.

Reinhardt, “Employer-Based Health Insurance: R.I.P.,” in The Future U.S. Healthcare System: Who Will Care for the Uninsured?, ed. S.H. Altman, U.E. Reinhardt, and A.E.

Shields (Chicago: Health Administration Press, 1997), 325–352; and U.E. Reinhardt, “Managed Competition: Are Private Employers Up to the Task?” Managing Employee

Health Benefits (Winter 1999): 1–9. 3. Hospitalists are physicians who are permanently stationed in a hospital, although they are not the hospital’s employees but

could be part of a group practice. 4. J. Gruber and M. Hanratty, “The Labor Market Effects of Introducing National Health Insurance,” Journal of Business and Economic

Statistics (April 1995): 163–174. 5. M.V. Pauly et al., “A Plan for ‘Responsible National Health Insurance’,” Health Affairs (Spring 1991): 5–25; and U.E. Reinhardt,

“An ‘All-American’ Health Reform Proposal,” Journal of American Health Policy (May/June 1993): 11–17. 6. L. Etheredge, S.B. Jones, and L. Lewin, “What Is Driving

Health System Change?” Health Affairs (Winter 1996): 94. 7. Kaiser/Commonwealth 1997 National Survey of Health Insurance. 8. E.E. Schultz, “Medical Data Gathered by

Firms Can Prove Less Than Confidential,” Wall Street Journal, 18 May 1994, A1, A5. 9. McKinsey Global Institute, Health Care Productivity (Los Angeles: McKinsey and

Company, October 1996). 10. Xerox Corporation, “HMO Performance Report,” 1997 Benefits Decision Workbook (Greenwich, Conn.: Xerox, 1997). 11. L. Etheredge, “The

Medicare Reforms of 1997: Headlines You Did Not Read” (Paper presented at a panel on health reform, sponsored by the American Political Science Association,

Washington, D.C., 27 September 1997. 12. Commonwealth Fund, “Majority of Employers Do Not Consider Reports on HMO Quality when Choosing Employee Health Plans” (Press

release, 15 September 1998). 13. The self-reported data are said to be audited, but little is known about the quality of these audits. 14. S. Williams, “Growing

Reliance on Self-Reported HEDIS Data Underscores Need for Auditing,” Medicine and Health Perspectives (18 May 1998).

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