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Beyond Employment-based Health Insurance: Medicare-like Single-payer System Could Spell Disaster

February 2006

STANFORD GRADUATE SCHOOL OF BUSINESS—Employment-based health insurance is in serious, perhaps terminal decline. From 2000 to 2004, premiums rose 59 percent, the number of individuals with employment-based coverage fell by 3.6 million, and Medicaid/SCHIP enrollment rose by 8 million. As of the Census Bureau's March 2005 survey, 45.8 million people had no medical insurance, including 17.8 percent of the U.S. population under 65. Only 60 percent of firms now offer medical benefits, down from 69 percent in 2000.

Should we keep patching up the current system with increased public programs and tax incentives? Or is it time to move away from employment-based health insurance?

Being in charge of their employees' and retirees' health benefits has led to tremendous costs and liabilities for many firms: Delphi, GM, Boeing, Safeway, the airlines, among others. We may be reaching a point where healthcare costs exceed the benefits to companies in acquiring a productive workforce and can even impair businesses' ability to compete. Rising insurance costs have led employers to hold back wage increases, raise co-pays and deductibles, and ask employees to shoulder a higher share of premiums. The employee share of a family premium averages $226 a month but frequently exceeds $500—an excessive expense for a low- or middle-wage earner. It is not surprising that many employees cannot afford to buy those benefits or are unwilling to do so.

Additionally, the current healthcare financing system does not work well for people transitioning between jobs, and those working in low value-added, temporary, part-time, or independent contractor positions. Independently purchased coverage is an inadequate option for those who need it the most, since a medical history all but guarantees unaffordable premiums. Meanwhile, relying on voluntary purchasing of insurance means that many individuals healthy enough to go without insurance or poor enough to fall back on public programs are able to withdraw themselves from the insurance pool and transfer most of their healthcare costs onto insurance buyers and taxpayers.

Employment-based coverage perpetuates other inflationary trends in purchasing health insurance. Attracting workers is still part of the equation, and therefore encourages spending. Moreover, since most employers offer only a single health plan and try to satisfy a group of workers with diverse needs, the most desirable option is often a costlier plan with a comprehensive benefit design, a wide network of providers, fee-for-service payment, and few controls on utilization. Even when employees do have a choice of plans, high employer and tax subsidies give them little incentive to select the most cost-effective plan. On the other hand, when individuals make insurance purchasing decisions for themselves and get to keep the savings from selecting a less expensive option, a majority are willing to sacrifice certain plan features, accept more coinsurance, or restrict their choice of providers in exchange for a lower cost. Consumer-driven insurance purchasing could encourage the development of cost-containment strategies and more efficient healthcare delivery systems.

Fee-for-service providers lack financial incentives to provide care efficiently: The more visits, tests, and procedures they order, the more revenue is generated. And yet, the above-described bias in decision-making by employers preserves it as the dominant reimbursement model. In a more cost-sensitive marketplace, greater market share would be expected for delivery systems with integrated information technology and salaried, capitated, or incentive-driven providers that profit from keeping patients healthier. A consumer-driven marketplace also would demand improved measurement and reporting of patient outcome and satisfaction indicators, something that could spur much-needed quality improvement efforts across the healthcare industry. Fewer benefit plans to administer and less enrollee turnover would cut administration costs for employers, carriers, and providers; reduce wasteful discontinuity in patients' care; and enable better health records and follow-ups. Above all, the combination of increased patient sensitivity to the cost of care and increased competition among expert health plan administrators can best exert long-term downward pressures on costs.

If employment-based health insurance appears untenable, what comes next? The conventional wisdom is that our situation leads us inexorably to a Canadian-style or Medicare-like single-payer model—a potentially disastrous choice. Exacerbating today's group insurance bias, a single government system would be driven to offer a uniform, extremely comprehensive benefit design, allow all providers without much regard for quality or cost effectiveness, and reduce opportunities for questioning the legitimacy of excessively expensive care. Worst of all, such a model would likely lock in the fee-for-service method of payment, which effectively removes all incentives for providers to become more efficient.

Besides, government is not suited to determine prices for millions of transactions, because it cannot efficiently adjust to regional disparities or constant changes in delivery settings and technology. Prices would likely be set too low to meet demand in some areas, while in others they would encourage ineffective, high-cost modes of care. Over time, constant political pressure from providers and patient advocates would inevitably ratchet prices up, not down. And one can fear irresistible opportunities for outright corruption if our largest industry is made to depend on a single source of payment.

We need systems that allow flexibility, innovation, and consumer choices, and align provider incentives with the needs of citizens for affordable care. Fortunately, alternatives to the single-payer models are being discussed seriously in at least two states: Wisconsin and New Mexico (see and These proposals are based on competition among private insurance carriers and delivery systems, yet they ensure universal health insurance coverage within the state.

Broad-based taxes on payroll, and possibly on consumption or personal income, earmarked for healthcare would replace current employer contributions. They would flow into a dedicated fund that is redistributed to eligible individuals in the form of virtual defined contributions. Individual consumers would use their credit allocation to enroll in the health plan of their choice. Its amount should allow them to enroll in an adequate but low-priced plan, which they can supplement with their own dollars for more costly coverage.

Regional exchanges would broker health plan selection by individuals, similarly to the Federal Employees' Health Benefits Program. The exchange would be responsible for enforcing coverage standards, administering a centralized enrollment procedure, and ensuring that health plans cannot profit from actively recruiting healthy people or avoiding the chronically ill (i.e., risk-adjusted premiums).

Both proposals still need work and face many technical and political issues. Determined, cooperative community efforts ought to be able to work through these questions. If they cannot, we are in for an even worse time with health expenditures.

Alain Enthoven is the Marriner S. Eccles Professor of Public and Private Management, Emeritus, at the Stanford Graduate School of Business. A member of the Stanford Business School faculty since 1973, Enthoven has been called "the intellectual father of managed competition," the theory that appropriately managed competition among healthcare provider organizations can lead to lower costs and higher quality care for consumers. Enthoven is a former assistant secretary of defense who served under Presidents Kennedy and Johnson. He is the author of Toward a 21st-Century Health System: The Contributions and Promise of Prepaid Group Practice (Jossey-Bass, 2004).