Employer-Provided Insurance and Forced Pooling
I have described so far an individual insurance contract, ignoring the fact that most insurance is now provided by employers. For some purposes this distinction does not matter. It doesn’t matter if an individual or his or her employer pays the medical or health-status insurance premiums. It doesn’t matter if the employer provides medical insurance. It does matter that if the individual gets a long-term illness; that he has individual health-status insurance (which can also be paid by the employer); that health-status insurance payments are made to the individual’s health-status insurance account; and that this account is, like a defined-contribution retirement account, entirely portable, so that a sick person who leaves employment can afford higher premiums.
However, the structure of most current employer-provided insurance is anathema to market-based insurance. Most current employer-provided health insurance involves forced rather than voluntary pooling. All employees pay the same nominal premium, both directly and through employer’s contribution on their behalf. Thus, employer-provided insurance attempts to force healthy workers to cross-subsidize sick workers and their families. Why don’t healthy people leave, as another insurer can offer them a better deal? Crucially, they can’t leave. You cannot ask your employer to direct his contributions to an individual plan, and you can’t take your own pretax contributions either. This can’t be changed without threatening employment-based coverage. If the healthy people could take their contribution, and their “employer contribution,” and buy cheaper or better insurance, no one would be left to cross-subsidize the sick.
Forced long-term pooling is the primary alternative to health-status insurance for providing long-term insurance. It is not a market solution – it requires extensive government intervention. It requires severe limits on competition between insurers, to bind the healthy to their pool of sick people, and thus begets poor service. It requires intrusive regulation to ensure that insurers don’t “contain costs” by cutting back on services for sick people, and it guarantees that nobody will be competing for their business. Forced pooling will always be imperfect, as people change any pool we can think of forming over their lifetimes, and it’s not obvious that being forced into one pool for life is desirable anyway.
Forced pooling is the heart of most health-care “reform” proposals – whether strengthening employer-provided insurance, creating pools based on geography as in the original Clinton proposal, forcing insurers to take all comers at the same price, assigning high risks to insurers, eliminating competition for healthy customers, or in the end stuffing us all into a single pool of nationalized health insurance -- to which the healthy must contribute, and from which they cannot escape -- with no choice or competition at all.
In this sense, health-status insurance is the exact opposite of most health-care reform proposals. It really doesn’t matter whether an employer or an individual purchases the health insurance. What matters is whether we provide long-term health security through forced pooling and the force required to eliminate competition, or through free exchange.