Employer Based Delivery of Healthcare

America’s Healthcare Revolution, a book written in 1986 by Joseph Califano, Califano traces the beginning of employer provided benefits back to Dallas, Texas. The year was 1929. Baylor University Hospital initiated a health plan that year for 1,250 teachers. Each teacher paid $0.50 a month and in return they received up to 21 days of hospital care each year. The concept was widely accepted and morphed through the 30s and early 40s. Along the way, doctors saw how well it worked for hospitals and started a competing organization. Both organizations soon discovered the work involved in keeping up with the programs and a “non-profit” organization was formed to take the burden away. It should be no surprise that the names of these two separate organizations in California, were Blue Cross and Blue Shield. All was well until World War II. At that time, the War Labor Board held the line on wages but it allowed up to a 5% increase in fringe benefits. Employers were quick to jump on the idea and began paying for healthcare costs in lieu of wage increases. This could be done without paying taxes on the “wage” substitute. The practice, in some form, has followed into the 21st century. So much so, the avoided taxes have become an irresistible pot of gold for politicians looking to fund endless projects for their supporters and voters.

On June 22, 2016, Republicans released a document titled, A Better Way, our vision for a confident America. After staking out their reasons the current healthcare reform has failed, Republicans lay out various pathways to change, amend or replace parts of the current law. Several of these are innovative and come from failed experiences of the current law. One of the bullet points is, Preserving Employer Sponsored Insurance. While the title catches the eye, the first sentence is quick to move the reader into unfamiliar territory. The acronym, ESI, is mentioned. Employer-sponsored Insurance, or ESI, is the same term in the aforementioned paragraph dating back to 1929 and the action taken by the War Labor Board in 1942 to allow increased fringe benefits in lieu of higher wages. Republicans, and a lot of Democrats, want a shot at the pile of money sitting at the end of the ESI rainbow. The pile of money has become, according to this report, the third largest healthcare expenditure after Medicare and Medicaid; an amount surpassing $3.6 trillion over the next 10 years. The Republican proposal attempts to ease into the saddle by “means testing” wages to be taxed. As with all taxes in the last two decades, those who make more, pay more. This plan does not set the wage at which taxes would be paid or at what level. The plan simply reads, “Only the most generous plans would see a difference and most Americans’ plans would not be affected.” I think I have heard something similar to that around 2010 when the Affordable Care Act was passed. As an aside, I heard on the news today that all references to “If you like your doctor, you can keep them…” have been removed from the healthcare.gov site. Any such promise by a politician, regardless of which side they sit on, creates a slippery slope. Nothing is to prevent all plans from being taxed in the future as power to control waivers from election to election.

So why is this important? Simply, it automatically raises the cost of healthcare by about 23% depending on your tax bracket. In addition the employer has to match a certain part of the tax in addition to all of the other expense. At the end of the day, employers in large numbers will likely stop paying anything for coverage, throwing employees to insurance carriers at what rates they can get approved by their state insurance departments. To replace the lost benefit, some employers will “gross up” wages or try to provide funds for the employee to purchase insurance on their own. This response again creates more tax revenue for the government since the employer must pay additional tax on higher wages. Depending on where the threshold is set to tax wages, an employee originally below the cap could be thrown into the upper bracket when his/her wages are grossed up and then taxed twice. So what is the answer?

All roads lead back to my original statement; we cannot finance our way out of a healthcare crisis. This entire proposed fix is based on financing, finding new dollars to pay for a broken system. We must stop shifting costs and begin shifting responsibility, responsibility for our own health and welfare.