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Should Employers Stop Providing Medical Insurance?

Michael Tanner, Senior Fellow at the Cato Institute, has a great follow-up to the Hobby Lobby case in National Review Online. I talked about this Supreme Court ruling last week, in the context of putting the government in its place with regard to employer-sponsored benefits. With his article, Michael is taking the debate a step further. He asks, why are the employers of this country providing medical insurance in the first place?

Michael gives us a brief history lesson and shows how employer-provided life insurance is really an historical anomaly dating back to World War II. It stems from a “perfect storm” of two government actions:

Government action #1: the imposition of wage and price controls.

At the time of a significant labor shortage, President Roosevelt imposed wage (and price) controls, preventing employers from competing for available workers by raising salaries. In an effort to circumvent the regulations and attract workers, employers began to offer non-wage benefits, among them health insurance.

Government action #2: IRS rulings regarding the taxation of compensation.

In 1953, the IRS compounded the problem by holding that employer-provided health insurance was not part of wage compensation for tax purposes. This means that if a worker is paid $40,000 and their employer also provides an insurance policy worth $16,000, the worker pays taxes on just the $40,000 in wages. If, however, instead of providing insurance, the employer gave the worker a $16,000 raise — allowing the worker to purchase his or her own insurance — the worker would have to pay taxes on $66,000 in income, a tax hike of as much as $2,400. This puts workers who buy their own insurance at a significant disadvantage compared to those who receive insurance through work.

As a result, Americans were driven to get health insurance through their job: In 1960, just a third of non-elderly Americans received health insurance at work, roughly. Today, 58.4 percent do. (That’s actually down from the peak of 71.4 percent in 1980).

Michael points out that the current situation can impose two forms of financial burden on consumers and employees:

Employer-provided insurance is problematic for several reasons. Most significantly, it hides much of the true cost of health care from consumers, encouraging over consumption. Basing insurance on employment also means that if you lose your job, you are likely to end up uninsured. And once you’ve lost insurance, it can be hard to get new coverage, especially if you have a pre-existing condition.

But at the time, employer-sponsored benefits have a political downside that affects both employees and employers:

But, in the context of Hobby Lobby, employer-provided insurance is even more insidious: It gives your boss the power to determine what is and is not included in your insurance plan. The government’s answer, of course, is simply to mandate that certain benefits, in this case contraceptives, be included. But that merely substitutes the government’s judgment for your boss’s. Thus we infringe on your employer’s desires and your own, leaving both of you at the mercy of politicians.

Michael has a solution to this problem.

It involves a shift in tax policy, and also tax liability offsets. The net result could be higher wages as well as increased consumer control over medical insurance benefits. It sounds like a win-win strategy to me. Take a look at his article – it’s a short read. Does it have any merit in your eyes?