Hobby Lobby ruling: The crux of the problem is employer-provided health insurance

Courtesy of the Minnesota Historical Society
Employer-provided health insurance is a legacy of World War II.

In Monday’s Burwell v. Hobby Lobby decision, the U.S. Supreme Court ruled that closely held private companies are not required to provide contraceptive coverage in their employees’ health insurance plans. The basis for the decision is the Religious Freedom Restoration Act of 1993, “which prohibits the “Government [from] substantially burden[ing] a person’s exercise of religion even if the burden results from a rule of general applicability.”  The court once again applied the idea of a person to a company, in this case “closely held corporations” (to quote the decision).

I’ll leave the person/corporation debate to the lawyers, political scientists, philosophers, and anyone else who wants to debate the point. Here, I want to focus on the crux of the problem: our employer-provided health-insurance system. In particular, the Supreme Court’s decision makes it clear that America’s experiment with employer-provided health care is a failure and that we need to move to either a single-payer system or a voucher system and remove employers from the health-insurance business.

This, of course, leads to a question: How did we get in this mess to begin with?  As usual in American public policy, it’s a combination of historical accident and a chronic fear of centralized power.

The historical accident

Employer-provided health insurance is a legacy of World War II.  Melissa Thomasson, an economic historian at Miami University, writes, “wage and price controls prevented employers from using wages to compete for scarce labor” but Congress wrote the legislation in such a way that it “permitted the adoption of employee insurance plans. In this way, health benefit packages offered one means of securing workers.”

After the war, two decisions cemented this arrangement. First, the National Labor Relations Board ruled that unions could bargain on behalf of their workers for benefits as well as wages.  Second, the IRS in 1954 codified a wartime rule that “payments made by the employer directly to commercial insurance companies for group medical and hospitalization premiums of employees were not taxable as employee income.”

Taken together, these two elements meant that management and labor could negotiate contracts that made trade-offs between taxable wages and non-taxable benefits as part of a complete compensation package. Once this arrangement was in place it spread rapidly through American industry.

Does this type of system make sense?  Yes, it does in a system where men were the primary breadwinners and they stayed in their jobs for most of their work life. 

But that’s not the economy we have today. Men and women both participate in the paid labor force, and we want Americans to be flexible in terms of changing jobs and starting their own businesses. Health insurance should therefore be something that stays with individuals (and covers their children) and moves with them from job to job rather than something that ties them down.

The Affordable Care Act and incremental change

We’ve had numerous opportunities to change this system over the past 70 years but haven’t done so. An important reason for this is that American public policy usually takes the form of gradual, incremental changes instead of radical, blue-sky transformations.

For example, consider central banking in the United States. Congress enacted the Federal Reserve Act in 1913, but instead of a single central bank it created 12 regional banks (e.g. the Federal Reserve Bank of Minneapolis.) Legislators and their constituents were concerned that setting up one central bank would give too much power to Wall Street and felt that regional banks would both diffuse this power and give the Fed a more balanced view of the U.S. economy.

Unfortunately, this system failed to protect the banking system during the Great Depression, so Congress tried again via new legislation in 1935. But, rather than starting over and creating a new, centralized Federal Reserve, they took the existing 12-bank system and added a new layer on top of it, the Board of Governors of the Federal Reserve System. The regional banks lost their autonomy in monetary policy but retained much of their independence in terms of their day-to-day operation.

The Affordable Care Act did the same thing as the 1935 Banking Act. Members of Congress and Americans in general were concerned with “big government” solutions to our health-insurance problems and were equally wary of “big business” answers such as health maintenance organizations (HMOs). Instead, the Democrats tried to shore up the existing system of employer-provided health insurance with mandates, subsidies and other types of fixes instead of starting over with a clean slate — and Republicans said no to all of it.

Now what?

The Supreme Court’s majority opinion suggests that the government can provide contraceptive coverage via employer-provided health plans by adding another Rube Goldberg innovation by either having the government or health-insurance companies pay for this benefit.

There is a better way to do this: Take the employers out of the equation. We can do this in either of two ways. First, we could expand our existing single-payer system (Medicare) to all Americans and phase out Medicaid, along with the myriad other programs we’ve added atop the current employer-based arrangement. This could be financed by eliminating the Medicare portion of the Social Security payroll tax and instituting either a national value-added tax or a carbon tax (or a combination of the two).

Second, we could set up a voucher system funded by the federal government through general tax revenue (again, perhaps through a value-added or carbon tax) along the lines suggested by Ezekiel J. Emanuel and Victor R. Fuchs. Private insurance companies would compete to provide packages that meet federal standards and that individuals can afford to purchase using their vouchers.

The old saying, “If you find yourself in a hole, stop digging” applies here. Yes, we’ve fought over the Affordable Care Act and yes, it passed muster with the Supreme Court two years ago.  But the court’s latest ruling only sets up another round of litigation that gets us no closer to what really matters for public policy: ensuring that all Americans have access to health care.  Let’s acknowledge our mistake in not getting rid of the employer-based base for our health insurance and get on with building a new foundation that will serve us in the future.

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Comments (16)

  1. Submitted by Hiram Foster on 07/01/2014 - 09:50 am.

    One way to think of employer provided health insurance is that it belongs to the employee, not the employer. It’s a form of compensation, just like wages. That means that it is the employee’s business not the employers, if the insurance provides certain controversial benefits. And if any employee objects to his insurance company paying for his or her birth control, the employee can just choose not to file a claim.

  2. Submitted by Dennis Tester on 07/01/2014 - 10:11 am.

    I agree with your diagnosis

    But I disagree with the treatment.

    After we decouple health insurance from employers for the reasons you cited, transferring the role to government is not the answer. Here are the preferred next steps:

    1. Require all people to buy their own health insurance the way all self-employed people do today and the way everyone, even poor people, currently buys their auto and life insurance. Using a broker or one of the many websites set up for that purpose can get you a policy in minutes.

    2. Make all health insurance premiums tax exempt. I misspoke in an earlier post and said “tax deductible” but I really meant to say “tax exempt.” That way it comes off the top of your gross income when filing your taxes the way only employers are currently allowed to do.

    It’s not enough to decouple health insurance from our employers, we need to decouple health insurance from any and all third-party payers, especially the government, to take advantage of the power of the marketplace.

    When people have to buy health insurance the way they buy auto insurance, they’ll shop around. And as the proliferation of TV ads selling auto insurance tells us (Progressive, State Farm, All-State, Geico) the insurance companies (with cute ads) begin to compete on price, quality and convenience, which causes all of those competing in the marketplace to get better at what they do and at a lower cost.

    I bought Progressive (ironic, eh?) because Flo talked me into bundling all my insurance needs into one policy for convenience and premium savings. My premiums keep going down year after year.

    The same thing could happen with health insurance. Giving the job to government will ensure the opposite will happen. And just to be clear, neither health care nor health insurance is a constitutional right, so there’s no argument to be made that government even deserves to play a role.

  3. Submitted by jody rooney on 07/01/2014 - 11:18 am.

    Good case for decoupling health insurance

    from business.

    However, I think while a carbon tax and value added tax sound appealing they are not necessarily going to be good consistent sources of revenue. There are too many sources of carbon to fairly capture the tax and in a service economy I don’t think that there is necessarily a good upside to value added.

    Since the Supreme Court likes corporations how about if everyone incorporates and then deducts their premiums?

    That solution like Mr. Tester’s of course doesn’t consider how to assist people who have barely enough income to pay for meeting basic family needs and with out medicaid or medicare would be unable to have any care.

    • Submitted by Logan Foreman on 07/01/2014 - 04:26 pm.

      Those people who have barely enough income to pay for basic

      Family needs are the very people that the Republicans want to die in the streets rather than provide universal health care

  4. Submitted by Neal Rovick on 07/01/2014 - 11:47 am.

    Reasons for high health insurance costs found in the US and not found elsewhere:

    1) The incredibly complicated insurance/billing industry eats up a large portion of each health-care dollar. About 30% of total spending and 1 in 4 employees are tied up with the administration of health care spending/payment..

    2) The health care product providers are some of the most profitable companies in the country. Our home town hero, Medtronic, has been repeatedly found guilty of kickbacks, and the highest compensated class of workers there are the salesmen who provide the incentive for the doctors to buy and specify. Ditto for other device makers and medicine makers. It turns out that Insurance companies are lousy at controlling costs–they make a percent of final costs–higher costs=more money and profits flowing through their company. The proof is that medical costs have exploded over the past few decades.

    3) The intense reluctance to face the idea that everyone is going to die and that there are costs associated with attempting to keep everyone alive for the maximum time. Every time the “death panel” meme come up, the further a rational discussion of cost/benefit gets further away and the insurers get less control over costs.

    http://www.businessweek.com/articles/2013-04-10/the-reason-health-care-is-so-expensive-insurance-companies

    Address those issues, and our health care costs would fall closer in line with the rest of the world.

  5. Submitted by Hiram Foster on 07/01/2014 - 01:57 pm.

    Lately, and I find this disturbing as a yellow dog Democrat, I have been finding myself agreeing more an more with Republicans. My concern over this is lessened considerably however, by the fact that Republicans don’t agree with themselves. When Republicans say that requiring employers should provide health insurance to employees, they aren’t wrong. The problem comes in that they don’t seem to understand the extent to which they are right. It really is a bad idea to make employers responsible for the health insurance their employees receive. As Mr. Johnston discusses, the decision was made for reasons which I am sure were persuasive at the time but are of no relevance today. Anyone creating a system of national health insurance from the ground up today wouldn’t dream of replicating the system we have now. If anyone wants to try, I would be glad to support such an initiative. But in practical political terms, that isn’t going to happen and we are left jury rigging repairs on a system while far less than it could be, still is capable of being considerably better than the nothing Republicans seems to favoring if not advocating these days.

  6. Submitted by Ray Schoch on 07/01/2014 - 04:39 pm.

    Insurance and care

    …are not the same thing. I’m inclined to agree with both Mr. Tester and Mr. Johnston in terms of the analysis. Unlike Mr. Tester, I have no problem with either of the alternative insurance structures Mr. Johnston suggests. Since I’ll be 70 this summer, I’m already enrolled in Medicare, and simply expanding a program that’s very popular and far more efficient (with rare exceptions) than private insurers makes sense to me.

    But if this will cause Mr. Tester’s aneurism to explode, then by all means, let’s privatize the whole thing – more or less along the lines he suggests – and let people shop for the best combination of price and service available. My son and daughter-in-law currently get their health coverage through their employers, and for all I know they might well prefer the more privatized version.

    My caveats for that sort of switch would include requirements that A) there be no fine print and/or legalese; and B) clearly-written, prominently displayed lists of what procedures, equipment and medications are covered, and how much will be paid for each one.

    Even that, however, doesn’t get at one of the most pernicious problems of our current setup, and that is that the public generally has no idea – and medical providers like to keep it that way – how much procedures, equipment and medication actually cost. My last routine visit to the doctor cost $165 for 15 minutes, but the only way I found that out was by reading the bill, after the fact. It’s certainly not posted anywhere in the reception area. The public is not well-served if the asking price for the 3¢ aspirin tablet that costs another 21¢ to deliver is $12. If your insurer will pay no more than double the cost plus delivery, you’ll be getting dunning letters ’til the day you die from the for-profit hospital insisting that you fork over the remaining $11 and change.

    So I can’t go along with Mr. Tester’s suggestion that we keep all of this far, far away from government. His auto insurance analogy is not without merit, but as politely as I can, let me point out that auto insurance is fairly tightly regulated, though more often by states than the federal government. No other entity except government – certainly not a nonexistent “market” in health care treatments – has any chance at all of keeping track of prices, much less having a widely-accepted mechanism to limit those prices.

    Other industrial nations – most of which have better health care than we do, and for less money per patient and taxpayer – either have the government run the whole show, or they find ways to combine private insurance (and often private treatment as well) with government supervision and regulation. I don’t know of a perfect system, but I would gladly adopt the French, or German, or British, or Canadian health-care system as a replacement for what we currently have in this country.

  7. Submitted by Hiram Foster on 07/02/2014 - 05:35 am.

    Market place

    The market place doesn’t have power. It’s simply a place, real or virtual, where goods, real and virtual, are bought and sold. What happens there is often determined by the power the participants bring there. Large corporations have market power. Individuals generally do not. That’s why it’s in the interest of individuals to band together. It’s a way of achieving, if not power equal to the corporations, at least enough power to which the corporations have to respond.

    Republicans wanted a role for markets because they were under the mistaken impression that markets keep prices down, and ensure a better quality of product. But they don’t really, and our experience with Obamacare has taught us that and showed us why. Premiums haven’t fallen because insurers don’t compete on price. As for quality, the health insurance market doesn’t really trade on quality because buyers have very little information on which to base judgments of quality. As anyone who has had a claim with an insurance company, you never know what your insurance company is like in terms of service, until you make a claim.

  8. Submitted by Richard Schulze on 07/02/2014 - 05:43 am.

    The rich world has as many different health care systems as there are countries, some with single provider, some with single payer, some with various types of insurance company. The common element that makes them all cheaper than the US is that in each case anti-monopoly laws are waived or ignored, and all of the buyers of healthcare band together to negotiate as a single party with the various suppliers of healthcare. This single-buyer monopoly advantage keeps costs down. Until the US abandons its free market principles and engages in similar monopolistic behavior, costs will remain high, and attempts at the margin to increase coverage will continue to be marginal and expensive. The healthcare industry in the US is profitable and a huge employer. To cut costs we need to take the profits away, and squeeze the doctors, hospitals, and drug makers until they scream for mercy, then squeeze some more. If done well, that could result in real change, after some real pain for providers and patients.

    We’re not there yet. Relative to what real reform would look like, Obamacare is a sideshow, making marginal changes to the existing system. It is a great deal less important than both parties make out. Re-arranging the deck chairs on the Titanic comes to mind.

  9. Submitted by David Markle on 07/06/2014 - 05:09 pm.

    The personal politics behind the decision

    Don’t forget that the five justices who voted to allow Hobby Lobby an exemption from contraceptive coverage for employees are all Roman Catholics.
    Surely single payer would be best, and probably cheapest.

  10. Submitted by Kevin Bradley on 07/06/2014 - 09:01 am.

    I’m still waiting for a good reason why I should be able to force another person to pay for my health care.

    • Submitted by Pat Berg on 07/08/2014 - 06:48 am.

      I’m still waiting for a good

      And I’m still waiting for a good reason why I should be forced to help pay for the costs of waging endless wars.

      Sorry, but we don’t live in a cafeteria society where we get to individually pick and choose what our taxes are used in support of.

      Of course, with the Hobby Lobby decision, that may be changing . . . . .

    • Submitted by Laurence Harris on 07/17/2014 - 07:54 pm.

      You don’t have to force anyone, our collective conscience as a society compels us to ensure people who need medical care will get it.

  11. Submitted by Laurence Harris on 07/17/2014 - 08:03 pm.

    So obvious

    This is so obvious but people simply assume that because we’ve had the current system for so long it must a good approach. It is not. No other country in the world relies on organizations such as employers, unions, and schools to provide health insurance.

    Our system locks people into jobs, denies people control over their own health insurance, forces more people to give up their plans and doctors than the ACA by far, and burdens businesses with a responsibility that does nothing to promote their business goals, among other problems.

    There are many alternatives besides the options offered by the author. Simply requiring everyone to purchase his own insurance, eliminating the business tax deduction for premiums and adding a 30% tax credit for individuals would pretty much solve it.

    • Submitted by george detellis on 11/15/2014 - 08:43 am.

      Let’s put an end to Employer provided health insurance

      Laurence, I totally agree with you. Americans should not get their health insurance through their employers. It makes a slave of the employee – tied to the need for health insurance for the family.

      If business and individuals were seperated from this bondage of providing and obtaining health insurance through the employee/employer relationship – both would be stronger and more prosperous.

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