How to Reform Health Care? ‘Let Them Have Choice’

Posted by Michael F. Cannon

This is big.

The federal tax code creates a large tax preference for employer-sponsored health insurance.  As a result, 61 percent of non-elderly Americans obtain health insurance through an employer.  That tax preference creates all sorts of problems.  It encourages more comprehensive health insurance and wasteful health care spending.  It deprives many workers of their health coverage at the moment they need it most: when they get sick and can no longer work.  And it denies workers the benefits of being able to choose their health plan.  Eighty percent of those who work for an employer that offers health benefits have at most two health-plan choices, which are typically both run by the same insurer.

To date, no one had really quantified the damage done by denying workers the ability to choose their own health insurance.  The only guesstimate of which I had been aware was by Mark Pauly, Allison Percy, and Bradley Herring, who “infer[red] that the true value of the welfare loss may actually be in the neighborhood of 5–10 percent,” which was enough to negate any advantage that employer-sponsored insurance offers by virtue of its lower administrative costs.

A new working paper titled, “Let them Have Choice: Gains from Shifting Away from Employer-Sponsored Health Insurance and Toward an Individual Exchange,” by Leemore Dafny, Katherine Ho, and Mauricio Varela, offers a more precise estimate of how much workers suffer because the federal tax code denies them their choice of health plan — and how much they would gain if they had greater choice.  (The authors have a shorter paper explaining their results here.)  They write:

We estimate the median welfare gain from expanding choice amounts to roughly 20 percent of premiums.  For the vast majority of employee groups and alternative model specifications, the gains from choice are likely to outweigh potential premium increases associated with a transition from large group to individual pricing.

Dafny, Ho, and Varela’s results provide a huge boost to free-market health care reforms.

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