Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Lifetime Healthcare and Retirement Accounts (Future HSAs)
New topic 2016-03-23 17:06:36 description

Employer-Based Health Insurance in a Nutshell

Modern health insurance is a century old in America, and much of its interesting history is irrelevant to present controversies. However, a few features are important to know as a preliminary. It started as benevolence by business to its employees after the First World War, at a time when most businesses were family-owned. In 1945, Henry J. Kaiser discovered health insurance could mostly be financed by successful corporate employers donating it to their employees, thus transforming a gift of health insurance into a business expense.

The gift soon became accepted as a normal part of wages, so the pay packet drifted downward to expect it. The employer paid the same total tax, but the employee got a tax reduction. When the corporate income tax rate became double the individual rates, the employer got twice the deduction the employee got. As other taxes began to be based on the remaining pay packet rather than the total wage cost, employers escaped the extra tax. The employer overall got more benefit from the tax shelter than the employee did, and he got it for every one of his employees. Less successful businesses (with less tax to pay) often could not share in these last two features, and often preferred to remain with Subchapter S incorporation, although their employees lost out on deductions and in general were the only losers. If this is new to you, read that last paragraph again.

In this way, the tax exemption became a normal part of business life, and tinkering was greatly resented. By a century later, CEOs have turned this matter over to Personnel offices and financial officers, forgetting its complicated mechanics, and have gone on to other matters. It was a gift, so the employees were seldom consulted about its details, and in time most employees became oblivious to them. The situation began to be known as "third-party" insurance, and in time the basic decisions were made without much consideration of either the employer or the employee, who seldom raised a fuss. In the course of a century, it was the wishes of the insurer that mainly dominated the decisions, mostly because decisions had to be made, and nobody else cared very much. A century of unopposed decision-making gradually warped the employer-based system into a very expensive, inexplicably complicated combination of incentives, all leading to escalating prices for healthcare. The foxes were in charge of the hen house, and everybody's incentive was to let healthcare prices drift upward.

It is the organization of incentives rather than greed or malice which led to this predicament, so it is not justified to attack anyone. But someone who has benefits to defend can become quite offended when the benefits are disparaged. For insurance company reasons, the useless and expensive 20% copayment system has persisted, while the deductible has remained too small to serve a purpose. For political count-the-votes reasons, the benefits package has favored numerous small pills over major surgery, warping the reimbursement system in favor of more transactions. As the disease has receded in younger people, young people have demanded "something for their money", even though it distorted the benefits package unwisely to use limited funds for small bills rather than large ones. Short-term gains repeatedly triumphed over long-term considerations, slowly but relentlessly warping it away from intended directions.

It is my feeling the average reader needs a little more background: in overfunding for Retirement, buying out Medicare gradually, first and last year-of-life insurance, and the plight of the latecomer to lifetime health insurance-- before we are ready to solve problems in the last five sections of this book. There are a few other salient issues to learn, and a century of history to skip before the casual reader is likely to be ready to address the issues in central contention. So, skip it or study it, that's what the rest of this section is all about.

Originally published: Tuesday, September 15, 2015; most-recently modified: Thursday, May 16, 2019