Posted: December 9th, 2014

H E A L T H A F F A I R S ~ V o l u m e 1 8 , N u m b e r 6 Downloaded from content.healthaffairs.org by Health Affairs on June 26, 2014 by guest I N S U R A N C E B A L A N C E S H E E T The System’s Debits

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A F F A I R S ~ V o l u m e 1 8 , N u m b e r 6 Downloaded from content.healthaffairs.org by Health Affairs on June 26, 2014 by guest

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The System’s Debits
n “Unsurance.” Unquestionably the worst shortcoming of the employer-based system is that the health insurance protection of entire families, including children, is

tied to a particular job and lost with that job. By international standards, privately insured Americans cannot really be considered “insured.” They are “temporarily

insured,” or “unsured” for short. In virtually all other industrialized nations, young people know that, come what may, they will have permanent, fully portable health

insurance. The United States has never been able to afford its citizens that luxury. Would any private health insurer today be able to offer a young American a life-

cycle health insurance contract, akin to the whole-life insurance policies that are available to young Americans? The job-based system has been a major roadblock to

the development of fully portable, life-cycle health insurance contracts. n Job lock. Because the employer-based system ties health insurance to a particular job, it

can induce employees to remain indentured in a detested job simply because it is the sole source of affordable health coverage. As Jonathan Gruber and Maria Hanratty

have shown empirically, relative to the U.S. health system, the fully portable health insurance provided by the Canadian provinces actually facilitates greater labor

mobility. 4 Fully portable health insurance, of course, is not contingent on government provision. Within a proper statutory framework, it should be possible to

develop fully portable private health insurance that is detached from the workplace.5 n Inequity. The tax preference enjoyed by the employer-based system is

inequitable for two reasons. First, it has never been fully extended to self-employed and unemployed Americans, which is unfair on its face. Second, even among

employed Americans with employer coverage, those with high incomes benefit proportionately more from the tax preference than do low-income employees in lower marginal

tax brackets. This inequity is most glaring in connection with the flexible spending accounts available only through the employer-based system. At the beginning of the

year employed Americans may deposit into these accounts, out of pretax income, specified amounts to cover out-of-pocket health spending. With this set-aside, well-todo

families can purchase a dollar’s worth of, say, orthodontic work or plastic surgery at an after-tax cost of only about fifty cents, whereas low-income families would

pay eighty-five cents or more after taxes for the same work. Furthermore, the law includes the inflationary provision that unspent year-end balances in the accounts

accrue to the employer. One suspects that Congress enacted
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