I hope one answer to this question will be to eliminate the tax advantage employers have over individuals in buying health insurance.
This government-policy induced distortion is a root cause to many problems that subsequent government-policy induced distortions have been aimed at fixing.
For example, this distortion caused much of the problem of pre-existing conditions that was meant to be solved first by maximum pre-existing condition exclusion periods at the state level and then by Obamacare.
How did this government distortion contribute to the pre-existing condition problem?
It causes individuals to change insurance carriers much more than they would if they purchased insurance privately.
How many times have you switched auto and home insurers? The answer for me is zero times.
How many times have you switched insurance companies? The answer for me over a dozen times. Sometimes the switch came because I switched jobs and more often it was caused by my company changing insurance providers.
My guess is that most people have switched health insurance companies more frequently than auto and home insurance.
If we bought health insurance individually, like auto and home insurance, a great deal of the switching would go away and a good portion of the problem of pre-existing conditions would, too.
But, instead of going after the root cause, we put in more government-policy induced distortions.
What’s the predictable effect of forcing insurance companies to cover pre-existing conditions?
What would you do if you owned a company that you knew at any time you would be forced to take on new customer whose cost to serve would be dramatically higher than other customers? You would likely charge your other customers more to cover that.
So, yes, the predictable result is that prices increase for the people who do not wait to buy insurance until they need it.
How exactly would eliminating the tax advantage employers have with purchasing insurance change things?
With much less insurance policy switching and insurance companies being forced to take on people with expensive pre-existing conditions, insurance will be cheaper, so more people with buy it, which also makes it cheaper — a double price reducing strategy.
Will the problem of pre-existing conditions continue to exist? Of course. But, it would be smaller and more manageable to cover through a more targeted, ‘keyhole’ approach.
By the way, this action was #2 on Planet Money’s podcast No-Brainer Economic Platform, which received support from their all of their panel of economists representing the full political spectrum, so it’s not just some crazy idea that I have.
Why haven’t politicians done it then?
This distortion has been around since World War II, so why haven’t they addressed it?
I believe there are a couple answers to this. One, is that it took a long-time for the ill effects of this come into being, making it harder to diagnose.
Another reason is that it’s harder for politicians to take credit for solving a problem because explaining how this tax advantage hurts individuals is arduous.
It’s also easy for political opponents to scare voters by saying that eliminating this tax deduction for companies may cause you to lose your employer provided plan and make you have to purchase insurance on your own.
That sounds scary.
But it will be replaced with a more affordable plan and will also result in more cash compensation from your employer.
It’s much easier for politicians get votes by appearing to solve the immediate problem (even if it causes more). I solved the problem of pre-existing conditions by forcing those big, bad, greedy insurance companies to accept your pre-existing conditions. Hooray!
Nobody seems interested in pointing out that the actual way to say the previous statement is, I solved the problem of pre-existing conditions by forcing people who buy health insurance — like you — to pay more for it to cover the people who wait until they need it.