Proponents of the tax exclusion for employer-provided health insurance contend that it provides the financial incentives that hold our employer-based, private health insurance system together and sustain a market-based alternative to the government-controlled health care models of many other countries. Funneling tax benefits through employers makes the after-tax cost of employer-financed health insurance more affordable. Additionally, there are relative efficiencies in the marketing and administration (and perhaps the risk pooling) of health insurance plans sold to larger employers as opposed to individual purchasers. However, economists Mark Pauly and Bradley Herring recently observed that, apart from tax considerations, the relative advantages of the employer group market, compared to the individual insurance market, are overstated. Their research discovered that much less risk segmentation occurs in the individual market, and less risk pooling occurs in the employer market, than is commonly assumed. They concluded that the real problem behind higher costs for individual health insurance is the higher administrative and marketing costs in a thin nongroup market that lacks persistent purchasers.
Employer-provided health insurance becomes increasingly anomalous as the pace of change in the economy accelerates. People are more and more likely to have to change jobs and to gravitate toward self-employment for at least part of their careers. These adjustments would be less wrenching if health insurance were attached to the individual rather than to the employer.
For Discussion. Suppose that the tax break for health insurance costs were given to individuals rather than to employers. What transition issues would this raise?