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U.S. Job-Based Health Care Flawed, Economists Say

Posted on: Friday, 24 June 2005, 14:50 CDT

NEW YORK -- The U.S. health-care system, which relies on insurance provided through employment, restrains productivity and leaves too many people without coverage, but ditching the system would be costly, economists say.

Some 63 percent of non-elderly Americans get their health insurance through work, either through their own jobs or jobs of family members. Most older Americans receive Medicare and people with very low incomes can qualify for Medicaid.

But some 17 percent of the non-elderly population - about 45 million Americans - have no insurance at all.

"The employment basis of health insurance is hopelessly flawed," said Alain Enthoven, professor of public and private management at Stanford University.

For one thing, companies aren't in the business of managing health. They use health insurance to further company or union goals, rather than contribute to a "rational and equitable" overall health system, Enthoven said at a conference on the economics of health care sponsored by the Federal Reserve Bank of Boston last week.

In addition to providing less-than-optimal care, job-based insurance also leads to distortions in the labor markets.

"The availability of health care influences whether people stay in the labor force or stay in particular jobs," Brigitte Madrian, an economist specializing in financial gerontology at the Wharton School of the University of Pennsylvania, said at the conference in Chatham, Massachusetts.

The job-based health-care system also encourages companies to hire fewer full-time employees and instead boost productivity by squeezing more hours from existing workers or to bring in part-timers, who may not qualify for health benefits.

The result is that "individuals are sorted into jobs where they are less productive," said Madrian.

Henry Farber, professor of economics at Princeton University, said a lack of access to health care for the self-employed "hurts the entrepreneurial spirit."

Costs and Access

Health insurance as a portion of worker compensation started to take off after the Second World War as companies vied for employees during a time of heady economic growth.

At the time, providing health insurance was relatively cheap for companies. But in the last five decades, health-care costs have been rising rapidly, growing on average 2.5 percentage points faster than aggregate income on an annual basis, largely due to advances in medical technology, according to Henry Aaron, senior fellow at the Brookings Institution, an economic think-tank.

Surveys of American show that most people believe the cost is worth it. The problem is how to pay for it.

"If we decouple insurance from employment, we will have to find some way to fund the innovations that people demand," said Robert Galvin, director of global health care for General Electric Co.

With costs rising rapidly, many companies have sought ways to limit them, by introducing health management organizations (HMOs) and, more recently, by offering workers health savings accounts (HSAs), which let employees keep and invest whatever dollars they don't spend.

Managed care has its problems. Programs that are too narrow limit choice and those that are too broad do little to contain costs. And HSAs might not be a great choice for lower-income people, who might be tempted to hold onto the cash rather than seek needed care.

Economists say further steps can be taken to contain costs.

The adoption of integrated delivery systems - systems built on a core of larger, multi-specialty group medical practices - is one way. Better use of information technology and payment protocols that reward performance and not just procedures also would go some way toward managing costs and improving care.

But such steps are piecemeal and do little to address the bigger problem of providing health care to the millions of people not insured by an employer, a problem that economists say will require sharply higher taxes or rationing of care for everyone, either through price or by government fiat.

With a tax-phobic public showing little appetite for the adoption of a government-funded universal care system, economists say the best plan may be to tinker around the edges of the system we have now, despite its flaws.

"We have to be careful about messing with institutions until we have something to replace them with," said Sherry Glied, professor of public health at Columbia University.

Madrian of Wharton noted that employer-based care does have its advantages. For one thing, she said, employers have bargaining power with insurance companies.

"The big question," she said, 'is how do we get the good aspects of this system and do away with the bad aspects?"

Source: By Andrea Ricci/Reuters

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