Tuesday, September 25, 2012

Employer Provided Health Insurance?

Why doesn't State Farm's logo look like this?

You should be able to go to your local State Farm agent (or to whoever provides you with your individual insurance) and say, "I would like some health insurance along with my fire, auto, and life insurance, please." But you can't, really. Why not? 

Economists like to point to two informational problems with insurance markets, moral hazard* and adverse selection**. Both these problems can theoretically lead to the collapse (or non-existence) of insurance markets. But these problems are present for all insurance markets, not just health insurance. And those markets exist, and have existed for years. And they generally work. Are the moral hazard and adverse selection problems worse in health insurance markets? Maybe.  

But one thing that is often overlooked in insurance markets is the power of price incentives. What's the difference between life, auto, and fire insurance and health insurance for many Americans? Life, auto, and fire are tied to the
individual, while health insurance is tied to the individual's job. The individual market for health insurance is in ruins because of a system based on employer-provided health insurance/care. The large tax breaks that apply when an employer buys health coverage for his employee do not apply if the employee buys coverage for himself. Identical coverage is artificially cheaper when purchased by a company rather than an individual.

But if the individual loses his job, he loses his coverage and has to find a new job with new coverage. This hurts the individual. If you lose coverage right in the middle of a treatment, you're out of luck -- and your new insurance is less likely to cover it, because insurance is a hedge against an uncertain future, and a treatment now is no longer uncertain. And if it does cover it, your employer is less likely to hire you because you are more expensive to them to hire.

These are distortions to the market that wouldn't exist if insurance was tied to the individual instead of the employer.

For a good description of why health insurance is tied to the employer and not the employee, see Milton Friedman on health care, circa 2001. (HT: Tony Cookson) Also, here is a very hopeful article about the future of health care from the Boston Globe circa 2005 when Mitt Romney was governor of Massachusetts. It also describes how we got the employer-based health insurance model.

* Moral hazard: In insurance, the tendency of insurance protection to alter an individual’s motive to prevent loss. Example: Car insurance coverage means you are less likely to drive carefully because if you get in an accident, the insurance company will pay for the damage. You are taking a hidden action (driving more recklessly) that the insurance company cannot see, but increases the chances that the insurance company will have to pay a claim. 

** Adverse Selection: In insurance, the problem that people’s demand for insurance is driven by their need, which is unobservable to the insurance provider. Example: Those with genetic markers for breast cancer will be more likely to buy insurance that covers expensive chemo treatments, but those without the marker will be less likely. You are making a purchase decision based on hidden knowledge (whether you have the marker) that the insurance company cannot see, and this leads to situations where more high-cost people purchase the insurance.

1 comment:

  1. Employment-based health insurance became a way to avoid taxable income. The employer contributions to employee health plans were exempt from employee taxable income.

    Speaking of insurance, if you are looking for an insurance company who offers different personal and business insurance policies, I recommend Gilbert Insurance. Check out their site to learn more about their policies.