The Covid-19 pandemic has placed enormous stress on the American workforce. Unemployment topped 14 million last spring as businesses and communities locked down. With so many out of work, you’d expect to see a spike in the number of people going without health insurance. Yet the number of people on employer insurance fell only 1% or 2% even as employment dropped 20% at one point.
Many employers continued to provide premium support to workers laid off during the pandemic. As the economy and the country begin to reopen fully, employer-based health coverage is surging back, providing benefits to millions of American families.
Although much maligned, employer-sponsored insurance has tremendous value for Americans, taxpayers and the health system. One way to quantify the value is to look at how much consumers are willing to pay for their coverage, which is at least as much as they pay in premiums—or else they wouldn’t have purchased the coverage—but could be higher.
Health economists have observed that many, though not all, consumers purchase coverage even when health insurance gets more expensive. Those still buying at higher prices are revealing a particularly strong willingness to pay. This is the “principle of revealed preference,” which, as a longstanding federal guidance puts it, ought to carry a lot of weight in policy evaluation “because revealed preference data are based on actual decisions, where market participants enjoy or suffer the consequences of their decisions.”
In a revealed-preference analysis released by the National Bureau of Economic Research, I find that employers and employees together value employer-sponsored insurance 75% to 84% beyond what they pay for it. For them, that is a surplus of $800 billion annually.
This doesn’t count the cost to taxpayers of the well-known exclusion of employer health-insurance premiums from taxable income, which reduces income- and payroll-tax revenue. On the other hand, the employer system encourages work and business formation, which adds to tax revenue. Based on tax-revenue studies published by the Congressional Budget Office and the White House Council of Economic Advisers, I estimate that the tax exclusion is an annual cost of about $200 billion, while the work and business-formation effects, together with increased insurance coverage and reduced subsidies paid through ObamaCare and Medicaid, represent an additional social benefit of $900 billion annually.
Together, all these benefits and costs constitute an annual net benefit of $1.5 trillion. That’s nearly $10,000 for every person insured. From providing coverage for 160 million Americans to encouraging work that drives the economy, this value more than justifies the dominant mode of health insurance in the U.S.
These numbers tell a different story from the one you’re probably used to hearing—that the employer system is a holdover from World War II. Critics argue that the employer system costs more than it’s worth, pointing to the health-insurance tax exemption. Some healthcare advocates say removing the tax exemption would allow funds to be diverted to subsidize ObamaCare exchange plans. This view neglects the strong demand for employer insurance and its true value, which far exceeds the tax subsidy and can’t be replicated in the individual market.
Employer coverage would pass the market test even without special tax treatment. Healthcare providers often exercise market power to sustain price increases—impeding competition with notorious “certificate of need” laws, for instance. Employer plans operate like buyers’ clubs, driving down prices from the suppliers—medical providers.
Costco members may not have a particularly elastic demand for specific brands of, say, bluejeans. Jean manufacturers might take advantage and increases prices when dealing with consumers individually. Costco, however, limits the number of manufacturers that can sell to its members to the few offering good products at the lowest prices. In effect, each manufacturer bidding to be in Costco faces a very price-elastic demand from the club because a small price increase may get its products booted from the store entirely. Similarly, employer plans take advantage of the power of the plan members to achieve cost savings, functioning as a competitive force in consolidated provider networks.
Additionally, employer coverage ties work to the opportunity to enjoy high-value, high-quality health coverage. Employment produces significant social benefits not only for individuals, but communities. Scholars ranging from
have documented the harm to communities from a lack of work and the positive effects of work on social capital, family formation and mental health—the social value of which I didn’t estimate, although it would add to the $1.5 trillion.
The alternatives to employer-provided health insurance—individual plans, government plans and going uninsured—often involve more public subsidies and can’t replicate much of employer coverage’s value. Employer-provided insurance is the vital centerpiece of American healthcare. It should stay that way.
Mr. Mulligan, a professor of economics at the University of Chicago, served as chief economist at the White House Council of Economic Advisers, 2018-19.
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