Cutting the Gordian Knot of Employee Health Care Benefits and Costs: A Corporate Model Built on Employee Choice

The U.S. employer-based health insurance tax exclusion created a system of employer-sponsored insurance (ESI) with limited insurance choices and transparency that may lock employed households into health plans that are costlier or different from those they prefer to purchase. It may also prevent them from adding to their take-home pay. The tax exclusion is also regressive and has diverted excessive resources into health insurance that could accrue greater value elsewhere. We propose creating a platform that builds on recently enacted federal rules and the requirements of the Affordable Care Act. We would give workers in large, self-insured groups expanded ACA-compliant ESI choices that would allow employees to control their ESI funds and tradeoff pre-tax ESI funds for taxable wages. We further propose regulations that would more thoroughly inform employees of their historical expenditures on health insurance, avail them of many choices currently available in the market, and arm them with the wherewithal to make informed choices. Our simulation of the economic results found that workers, especially those earning less than $50,000 annually, would benefit substantially. (The policies are priced with a holdback, that reflects the firm’s concentration of risk, so that employers’ current ESI funds are sufficient to cross subsidize high cost enrollees with low cost ones.) If workers were allowed to trade untaxed insurance dollars for taxed wages, our simulation indicates that nationwide annual federal income and after-tax household income would grow by $101–$252 billion, and most income and payroll tax revenues increase by more than $39–$163 billion annually. Further, giving workers greater autonomy in purchasing health insurance could lead to longer-term structural reforms in the insurance marketplace. Following the changes in the retirement investment market as it transitioned from pension investments purchased by employers to those purchased by employees, our platform would stimulate the introduction of more affordable offerings, trigger more price competition, and usher in innovative insurance and transparency products. Our simulation conservatively pegged the downstream savings in the cost of medical care at upwards of $100 billion. Because of the mammoth size of the ESI market, these savings may well spill over to the rest of the health care system, thus eventually affecting Medicare, Medicaid, and ACA enrollees.