This week, the Supreme Court hears oral argument in two cases asking whether for-profit business corporations have religious liberty rights. Hobby Lobby, a group of craft stores with 13,000 employees, and Conestoga Wood, a small Mennonite furniture maker, want to be free of the Obamacare requirement that employer-provided health insurance plans need to provide certain forms of birth control. They argue that their religious convictions prohibit them from covering such items. Religious institutions, reproductive-rights advocates, and others have sparred over the conflicting rights claims, but one important part of the conversation has been missing almost completely: Why are American employers deciding the contents of our personal health insurance plans?
It didn’t have to be this way. Yet for decades we have allowed our employers virtually unfettered freedom to make all health coverage decisions—not just those related to contraceptives—on behalf of employees and, in many instances, their family members. Why? Isn’t it time to rethink how we got to this place and whether we should do something about it?
Americans often fail to notice that a striking imbalance exists in health insurance purchasing: Although health insurance belongs to the employee, the employer gets to decide what that insurance will cover and under what terms. While contraceptives are the current lightning rod for controversy between employers and employees, tensions have emerged over the years around a whole range of health services, including treatments for autism spectrum disorder, in vitro fertilization, and bariatric surgery.
Why does health insurance actually belong to the employee? Because the employee pays for it—directly and indirectly. Though both employees and employers generally co-finance insurance premiums (in 2012, employees reportedly paid an average of 18 percent of individual plan premium costs, and 39 percent of family plan premium costs), employees functionally fund 100 percent of premium payments. In other words, employers’ health insurance premium contributions are not philanthropic investments—they are part of an employee’s net compensation package. There is a clear wage-benefit tradeoff at work in the case of employment-based health insurance. Economic research shows that employers make fewer investments in real wage increases when they increase their health insurance premium contributions. Seen this way, employers should not be permitted to spend employees’ remuneration in ways that subvert those employees’ interests.
This is the deeper issue that lurks beneath the contraceptive mandate discussions. No matter how Hobby Lobby is ultimately resolved, we have acceded to an arrangement in which employers will continue to have nearly limitless discretion to make health insurance decisions on behalf of most Americans.
In 2010, 55 percent of Americans received their health insurance through their place of employment or that of a family member. As General Motors executives used to quip, “We are in the health care provision business and make cars on the side.” In certain respects, they were right. Both General Motors and Ford have reported that they spend more on health insurance for their employees than they spend on steel. Similarly, Starbucks CEO Howard Schultz claims that Starbucks spends more on health insurance benefits than it does on coffee beans.
Why have employers emerged as the primary providers of health insurance in the U.S.? Several historic and economic reasons explain how we got here. Employment-based insurance coverage expanded in the early- to mid-1900s as unions increasingly demanded more benefits from employers. World War II–era wage controls played a contributing role as well. These wage controls exempted health benefits and thereby gave employers a convenient way to top up salaries and compete for scarce labor.
A variety of economic incentives also sustained employment-based coverage. Providing insurance at the place of employment presents an attractive way to pool risk and minimize adverse selection. A significant threat insurers confront is that individuals will only purchase health insurance when they are already sick and need to use it. But this risk is minimized when employees purchase their insurance at the workplace through a pre-designated enrollment process.
Employees also benefit from favorable tax treatment of employment-based health insurance. Under the tax code, health benefits are excluded from employees’ taxable income (they are also deductible for employers as business expenses). This tax exclusion is sizable—it reduces the functional cost of workplace health insurance by an estimated 10 to 35 percent, depending on an employee’s marginal tax rate. It is also one of the single largest federal government expenditures. According to the Congressional Budget Office, the health insurance exclusion reduced federal revenue by $248 billion in 2013, including lost income and payroll taxes.
All of this explains why employers have become big players in the health insurance business. But it fails to explain why employers are allowed to determine the cost, quality, and accessibility of the insurance they purchase for their employees. As a legal matter, under the Employee Retirement Income Security Act (ERISA), employers make these determinations as business decisions. Enacted in 1974, ERISA was designed to protect the interests of those participating in employment benefit plans such as pensions or, in this case, health insurance plans. But while this may have been the intention of the legislation, under ERISA employers maintain discretion to pick and choose health insurance plan contents according to their own business or other preferences, with only minimal restrictions in place. The historic rationale for this was that while employers had strong incentives to offer workplace health insurance (competitor companies were doing it, and there were tax benefits), there was no mandate for them to do so. As a consequence, employers were free to offer any health insurance or no health insurance and, consequently, employees had no right to workplace health insurance.
But Obamacare changed all that. Obamacare’s employer mandate will require large employers to provide coverage or pay a penalty starting in 2015. Employees of large firms now have a reason to expect that they will receive their health insurance at the workplace. When they do so, employers will be purchasing health insurance plans on employees’ behalf and using employees’ remuneration to do so. We have yet to reconcile ERISA with the Affordable Care Act in this respect, and it is important that we do so.
One way to remedy this conflict would be by establishing policy that makes employers into legal fiduciaries—like investment and pension managers and others who safeguard our personal investments. Such fiduciaries are entrusted with duties of care and loyalty to those who benefit from their services. They must act in the sole interest of those they serve, without regard to their own financial, moral, or other preferences. Employers, acting as legal fiduciaries, could invest employees’ remuneration in insurance plans offering a diversified pool of health benefits that reflect employees’ needs. We could require employers to ask about employees’ coverage needs before selecting health insurance plans for the next enrollment year, a practice that is largely nonexistent to date. For example, through an annual confidential survey, employers could capture employees’ health needs, aggregate them, and approximate a best-fit health plan or plans to satisfy employees’ needs.
Such a reconceptualization would be groundbreaking. Under this revised model, employers would act on behalf of employees and in their exclusive interest in buying health insurance. Employees’ needs—economic, moral, or otherwise—would come first.
Obamacare means that employers will remain the dominant providers of health insurance in the U.S. for the foreseeable future. That debate is over. But now is the time to challenge the existing model for health insurance decision-making and institute safeguards to ensure that individuals and families—rather than their employers—can pick the contents of the health insurance they buy. As conversations continue to swirl around the contraceptive mandate and Obamacare more broadly, let’s not forget an important conversation that hasn’t yet taken place—clarifying once and for all the role of employers as our health agents.