Approximately 60% of Americans under the age of 65 get their health insurance through their employers. The dominance of this arrangement traces back to WWII, when the federal government instituted wage controls and companies began looking to provide non-cash benefits to compensate their employees. In 1943 the IRS ruled that employees do not have to pay taxes on group health insurance premiums paid on their behalf by their corporate employers. This tax exclusion meant that the value of the benefit to the employee was greater than the cash equivalent (which would be taxable), and so more and more employers began offering health insurance plans as part of attractive compensation packages for their employees. Employer-sponsored insurance now accounts for 90% of the private insurance market.
But over the last 60 years, this tax exclusion has created a number of problems. Tom Miller, a health care policy expert at the American Enterprise Institute, explains,
[T]he tax exclusion … created unintended problems for the structure, cost, and availability of both private health insurance and health care, and these problems continue today. It has been criticized for raising—and hiding—the overall costs of health insurance and health care. It limits choices for individuals who are seeking other forms of coverage, and it can disrupt insurance arrangements of workers who are changing or losing their jobs. The tax exclusion dispenses its rewards disproportionately to higher-income workers in larger companies with better-paying jobs.
Large companies naturally have the most leverage when negotiating with insurance companies due to economies of scale. The insurance market is skewed toward these large employers, since 97% of companies with more than 100 employees offer health insurance coverage to their employees, compared to 40% of companies with fewer than 25 employees. Many medium and small-sized companies have found it difficult to provide comparable insurance benefits because their buying power is lower and their risk pools are smaller, leading many to offer cheaper high-deductible plans, or to forgo offering health insurance altogether. Individuals who wish to buy health insurance for themselves and their families (perhaps because their employers did not provide insurance, or because they were self-employed or unemployed) are offered the least-attractive plans, with steep premiums and meager benefits. Of course, those who suffered from serious and costly pre-existing health conditions have always been the most difficult to insure, and the enormous cost of insuring them often made them effectively “uninsurable” on the individual market.
For those with employer-provided insurance, the increasing cost of health care has meant steeper premiums and increased out-of-pocket spending. But the hidden cost to employees is more pernicious: Since employers pay a large share of their employees’ health insurance premiums–money that would otherwise be paid out as additional wages–increasing insurance costs have suppressed wage growth, and in many cases have kept wages from rising at all.
This is, in part, because health insurance is regulated differently by each state, and employers and individuals alike must purchase plans that comply with state mandates–creating monopolies of one or two insurance companies in many states. This patchwork regulation dramatically limits the insurance market, causing high prices.
The 2010 Affordable Care Act (better known as “Obamacare”) was introduced as a solution to many of these pressing problems. Millions of people who were unable to get health insurance, or good health insurance, through employers would be offered subsidized and regulated insurance offered on new government exchanges, or coverage through Medicaid (a government-run health-care program for the poor, which was dramatically expanded by many states thanks to incentives in Obamacare). Insurance companies would be required to offer health insurance to people with pre-existing conditions on the same terms as to others. Costs would be controlled through a new tax on expensive employer-provided policies, and through the deft management of federal health-care dollars by experts in Washington.
The results have included an expansion of coverage–primarily through Medicaid, a $450 billion per year program that frequently generates state budget crises and has been found by researchers not to improve beneficiaries’ physical health outcomes. At best existing trends in cost growth have continued. New regulations have caused an unknown number of people to lose insurance policies they wanted to keep, despite promises to the contrary. And the law has been estimated by the Congressional Budget Office to reduce the number of hours worked by the equivalent of 2.5 million jobs. (One reason this happens: The law’s subsidies decline when people work and earn more; so we should expect people to work less to maintain their subsidies, and consequently pay less in taxes.)
Facts to Know
- There are plenty of problems with Obamacare, and it has never had the support of the majority of the American public. Watch this video to see Jonathan Gruber, an architect of the law, explain that enacting Obamacare required lying to the “stupid” American public.
- Supporters of Obamacare, including President Obama, made many promises to secure the law’s narrow passage in 2010. Many of these promises have been broken. Among them:
- Promise #1: “If you like your health care plan, you can keep it.”
Obama promised this innumerable times, before and after the law’s passage. It was a demonstrable lie. Millions of Americans received notices from their insurance companies that their plans were cancelled due to Obamacare. Even PolitiFact awarded it their “Lie of the Year.”
Obama and his supporters promised time and again that Americans would see lower insurance premiums under Obamacare.
Although Obama specifically promised that the typical family of four would see a decrease of $2,500 per year in health care premiums, the data makes clear that their costs have actually risen since the law’s enactment. Again, even Politifact calls this a lie.
This interactive map shows the effects of Obamacare on the insurance premiums of individuals who do not get health insurance from an employer or a government program like Medicare or Medicaid. The accompanying study found these alarming facts:
“Across the country, for men overall, individual-market premiums went up in 91 percent of all counties: 2,844 out of 3,137. For 27-year-old men, the average county faced 91 percent increases; for 40-year-old men, 60 percent; for 64-year-old men, 32 percent.
Women fared slightly better; their premiums “only” went up in 82 percent of all counties: 2,562 out of 3,137. That’s because Obamacare bars insurers from charging different rates to men and women; prior to Obamacare, only 11 states did so. Because women tend to consume more health care than men, the end result of the Obamacare regulation is that men fare somewhat worse.
Relative to men, the average rate increase for women was less extreme: 44 percent for 27-year-olds; 23 percent for 40-year-olds; 42 percent for 64-year-olds.”
Additional studies have found that older women disproportionately bear the brunt of increased out-of-pocket expenses and premiums when purchasing insurance on a federal exchange.
- Promise #3: Obamacare will reduce the deficit.
The Republican staff of the Senate Budget Committee issued an important report in the fall of 2014, which found that–based on data provided by the non-partisan Congressional Budget Office–Obamacare will add $131 billion to the budget deficit over the next 10 years. The report notes:
“Before a joint session of Congress the President unequivocally stated, ‘I will not sign a [health care] plan that adds one dime to our deficits, either now or in the future.’ He repeated: ‘I will not sign it if it adds one dime to the deficit, now or in the future, period.’ At the signing ceremony for the legislation President Obama asserted that the plan would ‘lower costs for families and for businesses and for the federal government.’ The President also insisted, ‘It is paid for. It is fiscally responsible. And it will help lift a decades-long drag on our economy.’ But contrary to those assertions, the health care law has had a devastating impact on workers, the economy, and the federal budget.”
The committee staff also notes the enormous $300 billion discrepancy between previous estimates of the budget impact of Obamacare and current estimates.
What Role Should Government Play?
The federal government is deeply involved in healthcare. Its spending, regulations, and its tax code all play a large role in structuring the current market. Unfortunately it has exercised this power in a way that has tended to reduce patients’ power, increase costs, and, on balance, to restrict access to affordable insurance. Proponents of centrally-planned government believe that the government should guarantee and subsidize universal coverage, consolidate providers into large organizations, and have experts manage federal spending in a way that drives efficiency throughout the healthcare system. Free-market advocates favor making insurance more affordable so that people will voluntarily buy it, that centralization does not improve efficiency, and that government should take a more modest role of allowing a functioning market to emerge and empowering consumers within that market.
For an update on Obamacare and its impact on healthcare, click here.
Principles of Reform
The Galen Institute, a free-market public-policy organization that focuses on health care issues, has identified five principles for health care reform to promote security and choice.
- Affordability: Real reform should make it possible for people to select insurance that is less expensive than Obamacare coverage by picking the policy and benefits that work for them in a truly competitive market. Health insurance and health care will be more affordable if companies are competing to offer the best products at transparent prices.
- Choice: Real reform would offer a choice of plans, including plans that allow people to keep their doctor and their hospital, and policies that they want, not plans overloaded with mandates and red tape designed to satisfy government bureaucrats.
- Security: Real reform would enable people to get real insurance so that they get the medical care they need and not face soaring premiums if they or their family members get sick or hurt. Health reform should not disrupt current coverage for people who like their plans.
- Portability: Health insurance should be accessible to everyone. People should be able to maintain coverage if they move, change jobs, or even lose their jobs. That means allowing them to get tax benefits to help in buying coverage no matter where they get your policy.
- Accessibility: People who have pre-existing conditions should be able to get health insurance and not be shut out of the market. Real reform would ensure that everyone can get coverage and that no one will be denied insurance as long as they have maintained their coverage.
Engage: Solutions for Your Elected Representatives
Since Obamacare became law in 2010, free-market proponents have rallied behind the mantra of “repeal and replace,” and Republicans in Congress have cast many votes to repeal the law.
On June 25, 2015, the Supreme Court upheld Obama’s Health Law Subsidies.
While opponents of Obamacare have not reached a consensus on a replacement plan, several policy prescriptions have attracted widespread support from free-market advocates:
- Tax reform that encourages cost consciousness in employer plans while providing tax credits and deductions for the direct purchase of insurance for those without employer coverage;
- The ability to buy health insurance across state lines to create more choice in policies;
- Secure renewal of health insurance that is guaranteed so people who have health insurance can keep it and not see premiums soar if they get sick;
- High-risk pools run by the states and supported by federal dollars that create a strong safety net for those difficult to insure;
- Cost transparency so people can know the price of their insurance and medical services;
- Fiscal responsibility with no new taxes or increases in federal spending;
- Federalism. States should have a prominent role in reforming their health insurance markets and not be micromanaged by the federal government.
- State-level solutions
- The ruling on healthcare options may encourage states to form regional networks or to switch to federal exchanges. Many of the dozen states operating exchanges under the Affordable Care Act are encountering financial strains, and could join the three dozen states already using the federal marketplace, HealthCare.gov. Some policy experts say it’s possible most of those states will eventually do just that, creating a largely national exchange program. Another scenario could also play out: state-run exchanges are already discussing forming regional exchanges as a way to preserve more local control. More on this issue.
Thought Leaders in Healthcare
- Grace-Marie Turner is president of the Galen Institute, a think tank devoted to promoting free-market healthcare ideas. She also convenes the Health Policy Consensus Group, which provides a forum for free-market healthcare analysts from numerous organizations to work together and produce consensus policy recommendations.
- Sally Pipes is the president and CEO of the Pacific Research Institute in San Francisco. She is the author of numerous articles and books on healthcare policy, including this short broadside that makes the case for dismantling Obamacare piece-by-piece and replacing it with a market-oriented healthcare system–a system that removes many of the government-made distortions of the pre-Obamacare policy landscape and creates room for innovation and a functioning market. A Canadian by birth, Ms. Pipes sees clearly that the U.S. is making familiar mistakes, and she provides thoughtful critiques and policy alternatives that should serve as off-ramps on our march toward total government control of our healthcare system.
- James Capretta is a free-market healthcare policy expert at the Ethics and Public Policy Center and the American Enterprise Institute. He spent years in the U.S. House, Senate, and George W. Bush administration working on healthcare issues, and is widely-regarded as the go-to expert on Obamacare and its alternatives. He lays out many of his ideas in this essay.
- Yuval Levin is the editor of National Affairs, the widely-respected and influential quarterly journal of conservative ideas. Levin draws upon a deep background of practical experience as a White House and congressional staffer, but he is primarily regarded as a formidable public intellectual. Although he is expert in most domestic policy issues, his writing on healthcare is particularly good, and his writing appears in many leading newspapers and conservative publications.
For our 2017 Update on Healthcare, including updates on Obamacare, click here.
Questions for Discussion
- Is there a right to healthcare? If so, what is the best way to secure that right?
- Are individuals or the government better equipped to make healthcare decisions
- Which should be a higher priority for policymakers? Increasing insurance coverage rates, controlling healthcare costs, or improving the quality of medicine?
- How have changes in the healthcare marketplace affected you and your family? What changes would you like to see made?