The Problems With Employer-Sponsored Health Insurance

Austin Frakt adds a couple of additional points to the question of whether Paul Ryan’s Medicare plan is anything like employer-sponsored insurance. To recap: Frakt stresses the key similarity — that under both plans, the individual’s contribution increases over time — and I note that people in employer sponsored insurance get a much better value for the dollars. But ESI is far from perfect, as Frakt notes:

(1) By mediating insurance decisions, employers constrain choice, and that’s not without a loss. In an NBER paper last year, Dafny, Ho and Varela estimated that loss of choice to be worth about $2,000 to a family of four.

(2) Risk adjustment in an exchange-based (or managed competition style) system makes the pool effectively larger. It’s true that risk adjustment across multiple plans is imperfect. A single plan creates a single pool and there’s no beating that from a risk-pooling perspective. But it also removes all choice. (Back to point 1.)

(3) However, it should be noted that there is worker sorting, too. That is, individuals choose or stay with employers for the health insurance offered (“job lock” and related “entrepreneurship lock”). Thus, an employer-based pool might not reflect the risk of the population but rather the risk of those who choose to work for (or remain working for) that employer.

Frakt goes on to argue that the exchanges in the Affordable Care Act will alleviate some of these problems (i.e. job lock) and do a better job of pooling risk and providing group coverage for “the working-age populations.” In fact, it’s also possible that the ACA will begin to shift the nation away from employer-sponsored coverage. Under the law, states could allow large employers to access the exchanges beginning 2017, thus providing more coverage choices for Americans who want them.