ESI

14 Reasons Why We Need To End Employer Sponsored Health Insurance (ESI)

December 15, 2024 By Dan Munro

According to KFF — a definitive resource for healthcare policy, research and polling — over 158 million Americans paid for their health insurance coverage through their employer in 2023. This is most often referred to as Employer Sponsored Insurance (or just ESI) because employers heavily subsidize the total cost of coverage. With a population of about 336 million Americans in 2023 — that puts ESI at about 47% of the total population. If we subtract out the uninsured (about 26 million), ESI is closer to 51% of the insured population.

Here in the US, we have lived with ESI for about 80 years and given its totally opaque mechanics — not to mention enormous influence — it’s time we ended it. There may easily be more reasons why we should end it, but here’s 14 to start.

Accidental Design: ESI was never the product of intelligent design. It is literally an accident of WWII history. In fact, there’s no clinical, fiscal or moral argument to support this unique financing model and America is the only industrialized country that leverages employment as the governing entity for direct health benefits.
Not a core competency: Whatever business the employer is in — the vast majority aren’t in the actual business of healthcare, so they lack critical healthcare domain expertise. Attempts to acquire or build that domain expertise — even by large employers who have the fiscal resources — have all failed. This includes high profile ones by Walmart, Amazon/Berkshire/Chase (Haven), and Google (to name a few).
Lack of scale: Large group purchasing models may build (or buy) component elements of healthcare for their employees, but any of those fiscal (or clinical benefits) won’t auto-magically accrue to other companies.
Uncapped pricing: Unlike Medicare or Medicaid (where the government sets the price), commercial ESI pricing is effectively uncapped. It’s literally whatever the market will support — and what providers (who set pricing) can successfully demand. Healthcare is unique because unlike other markets, demand will always exceed supply — AND — there is no ‘demand elasticity’ for living.
Tax exclusion: While ESI started out as an accident of WWII — we then codified it into our tax code in the 1950’s. Today, Employers derive enormous tax benefits just for “providing” health benefits.” Today, this tax exclusion amounts to about $300 billion a year and represents the largest federal tax expenditure. This corporate welfare grows annually, and lives in perpetuity.
Incentivized to fund rich benefits: Obamacare (aka the ACA) attempted to reign in this corporate welfare by putting a cap on the federal tax exclusion (called the Cadillac Tax), but business lobbied successfully and an appropriations bill in late 2019 killed it. The Cadillac Tax might have begun the weaning process off of ESI, but corporate America stopped it cold.
Wage Tax: The employer “subsidy” for expensive health benefits is significant (at or near 60%), but it’s effectively an opaque (and unreferenced) tax on wages. The very real effect on wages, however, is far from opaque in this chart.
Open Enrollment necessity: By linking ESI to the tax code — we’ve tied health benefits more broadly to the whole tax calendar with everything churning annually. This includes the uniquely American insanity of “open enrollment” — which has no correlation or applicability to human psychology, physiology or biology. We should all contribute (through taxation) to our healthcare system, of course, but a period of “open enrollment” (with a very specific number of days every year) serves no clinical or moral purpose — only a fiscal one. As a footnote, this whole construct also left the door open for Medicare+Choice (now Medicare Advantage) to lure seniors back into commercial coverage annually (which CMS then pays extra for over and above “traditional Medicare”).
Employee tenure: According to the Bureau of Labor Statistics, the average employment tenure is 3.9 years. This “churning” of coverage (and networks) for the employee makes continuity of health care delivery almost impossible. Sure, employees move and change careers by their choice, but getting their health data and history to move with them is a nightmare. Just changing insurance carriers at the same employer is a nightmare.
Rise of Self-Insured Employer: Upset with the never ending and skyrocketing costs of healthcare — employers discovered a new way to control costs more directly and today, over 65% of workers who get health benefits through their employer are in “self-insured” plans. That means the employer — not the insurance carrier — is carrying both the fiscal and clinical risk — as unregulated insurance companies. The wallet card may say Aetna, Cigna, UnitedHealth or Blue Cross — but those big brands are only acting as Third-Party Administrators — not actual insurers. Yes, ERISA, COBRA, and HIPAA still apply, but self-insured plans are not regulated by state insurance commissioners. ERISA (largely a federal reporting requirement) has “fiduciary obligations,” but this is new ground legally for healthcare and has yet to be tested for applicability to health benefits. We can hold employers’ feet to the legal fire of “fiduciary obligation,” sure, but employers didn’t design this system, or set the wildly variable rates, so proving their negligence — while novel — will be challenging legally. I’ve seen a few lawsuits already, and there’s always the settlement door without admitting negligence — and that assumes the case survives preliminary judicial review.
Billable episodes of care: This constant churning of benefit plans and provider networks annually is totally counter-productive because it supports fragmented, episodes of healthcare for billing purposes, but it’s not coordinated, long-term or designed to support preventative healthcare. One of the reasons employers are generally less concerned about lower cost preventative healthcare is because they know the tenure of their employees is short-lived (less than four years) and they’re naturally reluctant to have longer-term health benefits accrue to the next employer — potentially a competitor.
Four party complexity: ESI represents a 4^th party — the employer — in the management of a complex (and expensive) benefit over a long period of time. That function is administratively difficult for even 3-party systems (payer, provider and patient) in other parts of the world. So why do we need a 4^th party to add to the layered and bureaucratic complexity? We don’t, but all the fiscal incentives are aligned to keep it this way — indefinitely.
Employer making clinical and fiscal decisions: From recent events, the subject of insurer pre-authorizations and claim denials has reached a fever pitch, but the false assumption is that it’s always the branded health insurance companies that’s responsible for those decisions. With self-insured ESI, it’s (ultimately) the employer who decides both the fiscal AND clinical benefit.

“Although the employer is responsible for paying their employees medical bills, when the plans are administered by a third-party insurance company it can seem like the third-party administrator is the party who should pay and should decide any appeals. But this is not the case, and the employer is at the forefront of any decisions regarding their employee’s medical coverage.” Adria Gross – CEO of MedWise Advocacy (30+ years of health insurance expertise)
Lack of leverage: Self-insured or not – employers (large and especially small) simply lack the leverage to negotiate price. Mark Bertolini (former CEO of Aetna – now CEO of Oscar Health) highlighted this insurmountable employer challenge earlier this week on CNBC’s ‘Squawk Box” when he advocated for ending ESI. The question posed to him was simply “what would you do?”

“What I would do is eliminate employer sponsored insurance. The ability of your employer to negotiate against the large insurance company – that has a much larger relationship with the provider community – is very stinted now. You can’t do it now. The companies have no leverage now. The foundation of our economy is small business and middle-market – they have none.” Mark Bertolini, CEO of Oscar Health

Now, employers love to complain openly — and often — about the high-cost of healthcare, but it’s a distraction because they also benefit from both the corporate welfare (tax exclusions) and depressed wages. The trifecta — as Mark highlights — is that they also lack the negotiating power to influence price so the cost of coverage can only go up.

There is no miraculous solution to this — no magic wand or fiscal calculation around this bouillabaisse of system design that keeps pricing spiraling ever upward because what we’re tinkering with is actuarial math (insurance) and for-profit commercial pricing — at scale. Employers (of every stripe and size) can certainly lobby for legislation to change this moral morass of tiered pricing, but they haven’t so far, they lack incentives to in the future, and it’s easy to see why. I’ve just listed 14 reasons (and I’m sure I’m missing some) but end this insanity we must.

Single-Payer Healthcare Isn’t Necessary – But Single-Pricing Is

December 13, 2024 By Dan Munro

[first published in Forbes July 4, 2017]

Once again, our healthcare reform is mired in muck. That means we’re also knee-deep and grinding away at our circular healthcare debate, but it’s really a big distraction because it’s the wrong debate.

We keep debating the math of coverage and cost as if they’re independent of system design — and they aren’t. As Senate Majority Leader Mitch McConnell is finding out, there’s no solution to the Rubik’s Cube he’s playing with, because it’s the same one we’ve been fiddling with for decades — tiered coverage to support tiered pricing. The only way to lower the cost is to end coverage (how and for who are just the dials).

The good news is that ‘single-payer’ healthcare isn’t necessary to solve our healthcare cost crisis. The bad news is that ‘single-pricing’ is, and that will require systemic change.

Lost in our debates (often intentionally) is a critical design component called universal health coverage. Here the landscape is littered with artifacts and variations of the term, but they’re often used in a way to disguise, confuse or obfuscate the core principle of universal coverage. There are many good definitions, but this one from the World Health Organization captures the general intent well:

“Universal health coverage is defined as ensuring that all people have access to needed promotive, preventive, curative and rehabilitative health services of sufficient quality to be effective, while also ensuring that people do not suffer financial hardship when paying for these services. Universal health coverage has therefore become a major goal for health reform in many countries and a priority of WHO.”

Terms like ‘universal healthcare,’ ‘Medicare for All,’ and ‘single-payer’ are typically substituted for universal coverage as if they’re interchangeable and all mean the same thing. They don’t, and the enormous distinctions are critical for any debate. Payment and coverage are definitely connected, but that connection can and should be simple and transparent — not complex and opaque. Universal coverage is that simplicity AND transparency.

What the U.S. has is tiered coverage designed to support tiered pricing. It’s not just complex for everyone, it’s totally opaque. Medicare, Medicaid, VA, Indian Health Services, employer-sponsored insurance, Obamacare and the uninsured are all different tiers of coverage — with different pricing. That works well to maximize revenue and profits, but the sacrifice to this design is safety, quality, and equality. A big myth surrounding the debate is that our system is just broken. It’s not. It’s working exactly as designed, and we need a different design based on the core principle of universal coverage.

Obviously, how universal coverage is paid for (either single or multi-payer — delivered through government or privately owned industries) is a critical debate, but who qualifies for coverage (and under what terms) shouldn’t be. There are only three big arguments against universal coverage — clinical, fiscal and moral — and they all fail. The clinical evidence alone isn’t dazzling, but it is compelling. As MedPage Today noted last week:

“There are a lot more studies covered in Woolhandler and Himmelstein’s paper, but they all suggest the same thing — that insurance has a modest, but real effect on all-cause mortality. Something to the tune of 20% relative reduction in death compared to being uninsured.”

That’s just the clinical evidence, but healthcare is really expensive, so health coverage is inseparable from payment — which, of course, is the fiscal or economic argument. As a country, we’ve been arguing, fussing and fighting over the economics of healthcare for decades — and are likely to for years to come — but this one chart is the only proof we need that we’re not just on the wrong clinical trajectory, we’re on the wrong fiscal one as well.

Our system design is the death spiral — not Obamacare. Of course, policy wonks and politicians love to confuse the debate with a heavy focus on the y-axis of life expectancy. The general argument here is that the data around life expectancy is too variable around the world, so it’s all wrong. By extension, the argument goes, the whole chart must be wrong, but I’ve seen no dispute with the x-axis because the math is bone simple. Take our (estimated) National Health Expenditure for 2017 ($3.539 trillion, from CMS) and divide that by our current population (325,355,000, from the Census Bureau). The result is a whopping $10,877 per capita spending — just on healthcare — this year (the chart only goes to $9,000 in 2014). [NHE now over $5 trillion and $15,000 per capita in 2024]

The argument that universal coverage is just too expensive for Team USA also falls with this chart because all of those other countries have some variant of it. Our debate swirls endlessly around economic options of tiered group (and now individual) coverage — but it’s all the science of actuarial math. The largest single group is always an entire country, and that’s also where the actuarial math is fully leveraged. As we can see from the chart, our decades-long battle with actuarial math has been epic, but the cost battle using tiered coverage (or some variant) is unwinnable.

All of which brings us to the final argument — the moral one. Germany was among the first to recognize the moral imperative of universal coverage with their Health Insurance Bill of 1883. We’ve argued this imperative as well — perhaps none so eloquently or succinctly as Dr. Martin Luther King, Jr. in 1966:

“Of all the forms of inequality, injustice in health is the most shocking and the most inhuman because it often results in physical death.”

He’s right and we know it.

The clinical, fiscal and moral arguments against universal coverage all fail, so what’s left? All we really need now is the logic behind our obvious and longstanding political intransigence against it. Why don’t we just implement universal coverage? Here’s the simplest and best answer I’ve seen from the legal mind of Harvard Law Professor Lawrence Lessig:

“You know, when Bernie was talking about single-payer healthcare people rolled their eyes. Not because it was a bad idea, but because there’s no chance to get single-payer healthcare in a world where money dominates the influence of how politicians think about these issues.”

He’s right and we know it.

Much of our ‘healthcare debate’ isn’t really a debate at all. It’s a huge distraction from our fatally flawed system — the status quo. We’re just grinding away at the math hoping for an undiscovered calculation to solve our Rubik’s Cube. Politicians and heavily entrenched incumbents love to debate the variants of tiered coverage (and opaque pricing) because it continues to support the enormous revenue and profits for the healthcare industry. At almost $11,000 per capita per year [over $15,000 now in 2024], our healthcare system is a gigantic monument to the priorities of ‘shareholder value,’ inequality and injustice — at scale.

No one group is to blame for our healthcare cost crisis because each segment of the industry is complicit, and they each have a fiduciary obligation to their shareholders. Payers, providers, pharma, suppliers, educators, software vendors and medical device manufacturers are all harvesting enormous profits from our $3.4 trillion ‘medical industrial complex’ [now over $5 trillion in 2024]. Naturally, they also lobby heavily for legislation to support those profits, and they have the war chests to do that effectively.

Again, a payment mechanism for universal coverage is the only real debate because there are many options and enormous ancillary benefits as well. Two of the biggest are single pricing (versus the opaque, tiered pricing of our current system) and the elimination of annual enrollment. I’ve never seen a clinical or economic argument supporting annual enrollment in health insurance because there aren’t any. That’s just not how healthcare works. It’s just another artifact (like employer-sponsored insurance) in a system that’s been optimized for billable episodes of care — not health — marching to the drumbeat of a tax calendar.

Single-payer is certainly one payment option, but it’s not the only one–and it’s easy to argue that it’s not a good cultural fit for Team USA. That’s OK because we don’t need single payer to get to single pricing. As one of the wealthiest countries on the planet, we can easily afford any healthcare system we choose — except one. The one we have.

11 Reasons Why We Need To End Employer Sponsored Health Insurance (ESI)

February 29, 2020 By Dan Munro

This post was originally published as 10 Reasons in Forbes last year, but there’s another big one I’ve added that’s critical as it relates to employers who provide health benefits to their employees – so I’m updating the post to reflect an important addition to the original list of 10. Here’s the list – with some minor readability edits.

Employer Sponsored Insurance (ESI) was never the product of intelligent system design. In fact, there’s no clinical, fiscal or moral argument to support this unique financing model at all. It is quite literally an accident of WWII history and America is the only industrialized country that uses employment as the governing entity for health benefits. Employees are literally tethered to an employer for healthcare. We could have changed this accidental system design decades ago, but we never did.
Whatever the business of private industry (either privately held or publicly traded), most enterprises aren’t actually in the business of healthcare so the vast majority have no specific healthcare domain expertise – nor should they seek to acquire it because it will never be a true focus or core competency. Large group purchasing models (like the one announced between Amazon, Berkshire and Chase) may purchase (or build) component elements of that domain expertise for their employees, but any of those fiscal or clinical benefits won’t auto-magically accrue to other companies – and let’s not forget – at least some of those “other” companies are direct competitors so the idea of sharing insights or lower pricing doesn’t make sense – and further assumes that hospitals or providers would agree to extend discounted pricing. Why on earth would they do that?
Unlike Medicare or Medicaid, ESI (and commercial insurance more broadly) supports inelastic healthcare pricing because it is literally whatever the market will bear based on group purchasing dynamics. This is also why Obamacare health plans are entirely dependent on a laundry list of subsidies. As individuals, few Americans can afford unsubsidized Obamacare plans outright. This also makes it entirely pointless to go through a lengthy legislative repeal process because it’s relatively easy to cripple Obamacare outright. Just remove the fiscal subsidies – which is exactly what’s happened (or planned). As a footnote to this, there are about 30 million Americans who are currently uninsured and another 40 million Americans who are underinsured.
The larger the employer (or group), the larger the fiscal benefit to the individual employer (or group) because of the group dynamic. That’s a compelling argument in favor of merger mania (leading to mega groups of millions of employees), but any of those effects don’t just ‘trickle-down’ to small employers. In fact, new business models (some with enviable ‘unicorn’ status in the ‘sharing economy’) are designed to ignore health insurance or health benefits outright. They may funnel employees to group-purchasing options – but that’s a marketing slight-of-hand to avoid the messy complexities and fiscal burden of managing ESI outright. Over 90% of net new job growth between 2005 and 2015 was from employers who offered no health benefits.
Like most other employment functions, ESI — and the employment process known as open-enrollment — is arbitrarily tied to our annual tax calendar, but that has no correlation or applicability to human physiology or biology. We should all contribute (through taxation) to our healthcare system, of course, but a period of ‘open enrollment’ (with a very specific number of days) serves no clinical or moral purpose (other than to continually update pricing or monitor for pre-existing conditions and possible coverage denial).
While big commercial titans capture all the headlines for many industry innovations (including high-profile healthcare initiatives like the ABC one referenced above), about 96% of privately-held companies have less than 100 employees. Each of these employers is effectively its own ‘tier’ of coverage and benefits. That works to support tiered (and highly variable pricing) but the only purpose of that is to maximize revenue and profits for businesses actually in the healthcare industry.
Big employers are notorious for binge (and purge) cycles of headcount that results in a constant churning of employees. Today, the average employment tenure at any one company is just over 4 years. Among the top tech titans — companies like Facebook, Google, Microsoft and yes, Amazon – average employment tenure is less than 2 years. This constant churning of benefit plans and provider networks is totally counter-productive because it supports fragmented, episodic healthcare for billing purposes – not coordinated, long-term or preventative healthcare. Insurance companies faced this same dilemma years ago – only to be penalized when those efforts (which led to healthier members) were delivered straight to their competitors at the next employer. So they abandoned many of those initial efforts around long term preventative health.
ESI represents a 4^th party — the employer – in the management of a complex benefit over a long period of time. That function is administratively difficult for even 3-party systems (payer, provider and patient) in other parts of the world. So why do we need a 4^th party to add to the layered complexity? We don’t.
ESI is heavily subsidized through local, state and federal tax exclusions and this is not a trivial amount because it’s revenue that local, state and federal governments never see. By some estimates, the local, state and federal tax exclusions combined amount to about $600 billion per year. This makes the tax exclusions tied to ESI the 2^nd largest entitlement behind Medicare. It’s effectively corporate welfare specifically designed to support expensive healthcare pricing.
The employer contribution to ESI is significant – typically over 55% of the cost for PPO coverage (family of 4) – but this also helps employers keep wages artificially depressed. In fact, in recent years, the galloping cost of healthcare has tilted unequally to employees – and shifted away from employers. The days of ‘sharing’ those annual cost increases equally are clearly over.
In another slight of hand – the big brand insurers like Aetna, Cigna or Blue Cross will distribute a wallet card to employees for health benefits, but it hides the fact that all too often, those big insurance companies aren’t carrying the fiscal risk. They’re simply being paid to design and manage the benefits of networks and providers/hospitals (based on tiered pricing). The big brand health insurers also handle claims processing and this outsourcing service (literally called Administrative Services Only or ASO) typically applies only to very large employers, but today, thanks to technology, even relatively small companies can be “self-insured.” Through the years, this migration (to employers as unregulated insurance companies) has resulted in about 61% of covered workers being under the umbrella of unregulated, self-insured employers. Why would employers want to do this? Because as self-insured companies they aren’t under any insurance regulation. Self-insured employers are entirely free to design benefit plans (with the assistance of big insurers and brokers) that suit their fiscal objectives.

The combined effect of ESI – again, uniquely American – is the most expensive healthcare system on planet earth and one of the biggest systemic flaws behind this ever-growing expense is ESI. As a distinctly separate flaw (I call it Healthcare’s Pricing Cabal), actual pricing originates elsewhere, of course, but employers really have no ceiling on what they will pay – especially for smaller (under 500) employer groups. This year – 2019 – America will spend more than $11,000 per capita – just on healthcare, and the average cost of PPO coverage through an employer for an American family of four is now over $28,000 per year.

Employers love to complain openly and often about the high-cost of healthcare, but they also benefit from both the corporate welfare of tax exclusions and depressed wages. The evidence of their real reluctance to systemic change is their strong opposition to the Cadillac Tax because it was the one tax proposal (through the Affordable Care Act) that was specifically targeted to cap the tax exclusion on very rich (so-called “Cadillac”) health plans offered by employers. The Kaiser Family Foundation has a compelling graphic on the long term and corrosive effect of ESI.

Don’t get me wrong, employers could band together and lobby to change the tax code to end all the fiscal perversions of ESI – but they won’t. They love to complain about high costs, but collectively, they are as culpable as large providers who work to propel prices ever higher – with no end in sight.

There is no miraculous solution to this – no magic wand against the trifecta of accidental system design that keeps pricing spiraling ever upward. That trifecta is actuarial math, ESI, and the transient (annual) nature of health benefits delivered at scale through literally tens of thousands of employers. Commercial (or private) ventures of every stripe and size can certainly lobby for legislation to change the moral morass of tiered pricing through employers, but they haven’t so far, likely won’t – and they certainly can’t end it. We are living with this moral mess as an accident of history. We need to end it.

The bad things [in] the U.S. health care system are that our financing of health care is really a moral morass in the sense that it signals to the doctors that human beings have different values depending on their income status. For example, in New Jersey, the Medicaid program pays a pediatrician $30 to see a poor child on Medicaid. But the same legislators, through their commercial insurance, pay the same pediatrician $100 to $120 to see their child. How do physicians react to it? If you phone around practices in Princeton, Plainsboro, Hamilton – none of them would see Medicaid kids. Uwe Reinhardt (1937 – 2017) – Economics Professor at the Woodrow Wilson School of Public and International Affairs at Princeton