If hell were designed exactly for me, this is what it would look like. After years of writing about health insurance and how employer involvement is nonsensical, I am now dealing with it first-hand as I figure out what health insurance coverage to get after leaving my job.
I want to do a quick history lesson because it underpins one of the my most deeply held beliefs about why healthcare in this country is a cluster f***: employers should not be involved in purchasing healthcare.
Your employer choosing which health plans you can sign up for is a uniquely US quirk that makes 0 sense. But to understand how we got here, we need to go back in time to WWII.
World War 2
Well actually, first we need to start in 1918. The IRS does a massive overhaul of the tax system. Nestled between 3 pages defining what a “blended” whiskey is and how it should be taxed, there’s a small note that says the money received for health insurance and worker’s compensation is exempt from taxes. This doesn’t matter now, but will in a couple of decades.
Remember, at this point healthcare is not expensive because healthcare services and therapies themselves weren’t that complicated. Someone came to your house, put a leech on your eyeball and told you to do a line of coke to fix your infected leg. Most people paid out-of-pocket for healthcare, so health insurance was a tiny industry at this point. There’s literally more nuance about taxing circuses in this bill.
Fast forward to 1942 - it’s WWII. You’re President Roosevelt. It’s time to kick some Nazi ass. Wolfenstein IRL.
Problem is that most of your labor force is now fighting the good fight, so the remaining people working in the factories are limited in supply. This is inevitably going to cause factories to spend more and more in wages to compete for this small pool of labor, so you’re worried about suddenly setting off an inflationary spiral. It’s kind of like data scientists in the Bay Area today, but applied to the entire economy.
So what do you do? You flex on em’ with your executive order and sign a bill that tells employers you’re not allowed to increase wages. And in that bill we’re going to include ANY type of compensation like bonuses, gifts, etc. because we don’t want any funny business. But we’ll make a small exception, I mean what’s the worst that can happen…?
Salaries and wages under this Order shall include all forms of direct or indirect remuneration to an employee or officer for work or personal services performed for an employer or corporation, including but not limited to, bonuses, additional compensation, gifts, commissions, fees, and any other remuneration in any form or medium whatsoever (excluding insurance and pension benefits in a reasonable amount as determined by the Director).
In 1943 the IRS rules definitively that companies paying commercial health insurance companies for group health plans for their employees would be considered “ordinary and necessary” business expenses instead of compensation to employees.
Now you have the perfect storm. Employers are trying to figure out how they can attract talent without increasing wages. The IRS decides that paying health insurance companies isn’t compensation. And employees don’t count health insurance from their employer as taxable under gross income. So employers start realizing that giving lavish health benefits packages to their employees is the way to go (they didn’t have Kind Bars back then). Soon, it became extremely normal for your employer to be paying a commercial insurance company for your healthcare.
For a while, everyone was cool with this because healthcare wasn’t very expensive. But then healthcare technologies started getting more complex and expensive. Hospitals also realized that the people getting the healthcare services (patients) and footing the bill (employers + health insurers) were separate entities. This allowed the hospital to direct patients to more expensive care settings, with the insurer and employer getting the bill later.
So we have a system which gives employers major tax benefits on the dollars that they provide to insurance companies to provide plans to their employees. Now your employer now chooses your health insurance, gets lots of tax breaks for doing so, and then take that money from your paycheck to combat the rising cost of delivering healthcare. This creates lots of market failures.
Because of the system we have, more and more dollars are getting diverted from your paycheck and into your healthcare benefits. The increase is happening much faster than inflation or wage increases.
Here is a list of some of the market failures an employer-based system creates:
- Your employer chooses your health insurance for you. This means whenever you switch employers, you switch insurance. So your insurance actually won’t care about your long-term health outcomes because you’re probably going to churn from their plan when you change jobs. If you ever thought to yourself “why doesn’t my insurance pay me to do healthy things?”, this is one big reason.
- Insurers don’t have to care about acquiring you as a customer, they care about acquiring your EMPLOYER as a customer. That means insurance companies compete on price and savings, not on customer experience. This is why your customer service experience with your health insurance carrier is as enjoyable as the colonoscopy they might deny.
- Your employer can now use health benefits as a means of keeping you as an employee. In one survey more than half of people said the health insurance coverage is a key factor for how they pick their employer. This creates “job lock” where you’re stuck at an employer, and it also prevents people from leaving to start companies (like ya boi) which is bad for the economy.
- Your employer is now expected to be an expert in healthcare. Why are HR departments doing diligence on healthcare technologies and services? Requiring this expertise in-house is silly!
- Hospitals can have artificially high list prices for services, which insurers are cool with because then they can show your employer how much they “negotiated the rate down”. This is dumb because the prices are high in the first place because of this weird relationship.
I can keep going, but you get the gist. This small taxation quirk has led to massive downstream effects, and no one who benefits from this system wants to change it (employers, third party benefits managers, insurance, hospitals, etc.). But patients and the economy bear the cost.
There have been lots of attempts to change this including the Cadillac Tax, Health Reimbursement Arrangements, etc. but none have quite been able to push through or make a dent. I’ll talk about them another day.
But what if we went back in time, and the US went a totally different direction in healthcare?
A Parallel Universe
One interesting thing to think about is how the United Kingdom went almost the entirely opposite direction at the same point in history. Before WWII, the country had the National Insurance Act of 1911 where a portion of wages were collected to pay for free healthcare. This only applied to people with jobs though.
Most physicians at this point derived their income from private practices, where rich people paid out of pocket for nicer amenities. But to support the rest of the population, a patchwork of charities, emergency funds, and donated physician time sufficed.
Now World War II happens. A report called the Beveridge report is published in 1942 and becomes really popular. It outlines the need for a social welfare state post-war that will address the 5 great evils that will topple society: want, disease, ignorance, idleness and squalor. Bernie? Is that you?
Britain is victorious, but the country is in shambles.
Principles from the Beveridge report are put into action, and the UK establishes the NHS to nationalize the healthcare system and make it free for anyone at the point of care. Unsurprisingly, all the hospital groups, private practice doctors, and rich patients are super against this.
"If medicine were taken over by the state," Lord Horder said in 1948, in a speech to the Society of Individualists, "it would be as disastrous as was the domination by the Church in the Middle Ages; a greater disaster, because the Church was cultured."
Lol. Old-timey burns are so much better.
Anyway, the private practice doctors are allowed to keep their private practices and the NHS is formed. Today, the UK has an almost entirely nationalized healthcare system which looks similar to the initial conception of it in the 1940s (you do have to pay for SOME things now). People seem to like it.
To be clear, there are downsides of having a nationalized healthcare system which I’ll probably talk about at a later date. And these survey designs are bad for reasons I’ll talk about then too. But it’s interesting to see how two parallel systems were created around the same time.
Next time, I’ll talk about how this system is super annoying for me on a personal level.