Viewpoint: Why Does the U.S. Rely on Employer-Provided Health Care System?

May 1, 2012
In this system there is almost no dynamic interaction between buyers and sellers of health care and very little competition between providers.

How did it happen that practically alone among the nations of the world, the United States relies on an employer-provided health care system with the exception of care for the indigent and elderly?

Most every other nation employs either a government-run health care system, or a free market in which consumers purchase care (if they can afford it) from medical providers. So how did we end up with our employer-provided health system? And more importantly, how can we use this fact to drive some common sense economics into the system to improve care and dramatically cut its cost?

It all started during World War II, when the U.S. government instituted wage and price controls on industry to help stabilize the economy and pay the enormous cost of fighting a global war on two fronts. The labor market was tight at the time because of the increased demand for goods and the decreased supply of workers owing to the draft, and large enterprises such as the Kaiser Shipyards in Oakland were desperate for workers to build the ships needed for the invasion of Nazi-fortified Europe. So Kaiser and other large businesses began offering group health insurance policies as fringe benefits -- which were not subject to wage controls -- as a strategy to attract more workers.

It worked better than anyone imagined. By 1950, more than 142 million people were enrolled in employer-provided health insurance plans.

Interestingly, in the beginning, these policies covered relatively-infrequent but expensive events such as major procedures and hospitalizations. They were called "major medical" policies -- a term that survives to this day. But today's "major medical" policies bear little resemblance to those of old. Today most insurance combines catastrophic insurance with prepaid medical coverage for routine visits.

As employee-consumers, of course, we have very little skin in the game. We pay our copays, grumble about our deductibles, but don't come even close to paying what it really costs for care. The situation is somewhat analogous to buying auto insurance that also covers the cost of gasoline, routine maintenance, the replacement of tires, and even the cost of using toll roads.

The problem with this employer-based health care system, of course, is that it defies the logic of the free market, and therefore costs dramatically more than health care does anywhere else while resulting in significantly less health for the citizenry.

As healthcare futurist Joe Flower notes in his new book Healthcare Beyond Reform: Doing It Right For Half The Cost, a free market requires a dynamic interaction between a buyer and a seller. The buyer knows what he or she wants and the seller knows the product. The dynamic interaction between them -- and the competition between various sellers -- inexorably creates ever-better products and services, ever-increasing market efficiency, and ever-more affordable prices.

There's a reason why almost every nation on earth strives to create a free market economy. For all its faults (monopoly and income inequality), it still works better than any other system to create social wealth and meet the needs of the majority of citizens. The Soviet Union collapsed precisely because after 72 years of socialism it still couldn't build a decent refrigerator.

But Soviet socialism isn't the only form of distorted and inefficient market economics. Another is our current employer-based health care system, in which there is almost no dynamic interaction between buyers and sellers of health care and very little competition between providers. In our system, the employer is the principal buyer but this employer has no direct interaction with health care providers in most cases. The insurance company stands between them -- sucking up a great deal of the profits, stifling competition among providers who get paid no matter how good or bad they are, and passing on the ever-increasing costs to employers (and ultimately to consumers and society.)

Trust me, I know. I used to run hospitals, and you won't find a crazier and more irrational market anywhere else on earth (with the possible exception of North Korea). In the words of bestselling Harvard Business School professor Clayton M. Christensen -- author of The Innovator's Prescription: A disruptive Solution for Health Care: "By some estimates, a staggering 50% of health care consumed seems to be driven by physician and hospital supply, not patient need or demand."

Some may say this is just the cost of getting the best care possible. But it's not. Many other nations have far stronger measures of health -- lower infant mortality, longer life expectancy, lower rates of cancer and heart disease -- than the U.S., and at much less the cost.

A new wave of consumerism in the healthcare industry, however, is beginning to spawn important innovations that offer some promise of better care at lower cost. We see clinics popping up in grocery stores, hospitals being rated on their "health-scores," more transparency among pharmacy benefit managers (PBMs), and entrepreneurs starting health care businesses catering to the patients who spend their own money from their tax-deductible health savings accounts.

Yes, we're seeing lots of innovation at the margins of the health care system, but very little innovation at the center where it would really count -- i.e., in the workplace where employer-sponsored health plans reign supreme.

All too often, I see employers tip toeing into offering consumer driven healthcare plans to their employees, almost apologizing for offering a plan with such a high deductible. Very few employers understand the advantages of such plans for employees and their families. They fail to realize that many employees would jump at the chance to gain some control over their health spending.

Don't forget, 50% of employees incur only 3.5% of all healthcare spending. But their premiums are the same as the chronically-ill who spend the vast majority of health care dollars.

Wouldn't the low-spenders like to see a rebate of the unused portion of the average $2,250 a year they contribute towards health insurance -- which is about 15% of the total $15,000 a year cost of insurance coverage for the average American family? Consumer-driven health plans combined with tax-deductible health savings account is one way to get back some of that money.

We all need catastrophic health coverage for those unforeseen events that can arise. We don't all need a prepaid medical plan every year. Why not go back to major medical policies and then give the savings to each family to purchase what makes sense for them and their specific situation?

CEO's it's up to you to make the difference. You are the linchpins of the craziest and most-inefficient health care system in the world. You are the ones who can inject some free market sanity into the system by, among other things, incentivizing your insurance brokers and HR managers to develop lower-cost and more rational insurance plans. And you are the ones who can incentivize your employees to join company wellness programs and get healthier and more productive at less cost.

Distorted economic incentives have driven us into the health care corner we find ourselves in today. Rational economic incentives -- driven at the point of purchase by the CEO -- can get us out of this mess and give us not only healthier employees but a healthier bottom line as well.

Darrell Moon is CEO of Orriant , a wellness program provider.

See Also
Listen Up CEOs, Cutting Healthcare Costs is Your New Job

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