Employer-Based Health Insurance: “Job Lock” Is Not the Problem, “Insurance Lock” Is

Over at The Incidental Economist, Austin Frakt is publishing an interesting series on “job lock”. This is the idea that, because most of us get our health benefits from our employers, we are “locked” into jobs we don’t like because they offer benefits which we do like (or need).

We get our health benefits from our employer because they are non-taxable. If employees bought health insurance on our own, we would pay premiums with after-tax dollars. Given this government discrimination, the idea of job lock makes sense: If we got our homes from our employers, we would surely hesitate to switch jobs, which would result in forced eviction from the current home to a new one.

But while there may be some job lock due to employer-based benefits, the problem has become way overblown in public discourse, with politicians like Nancy Pelosi claiming that Obamacare would free the masses to pursue artistic dreams, free of wage slavery.

As discussed in a previous blog entry, job lock—qqqas an independent factor in employees’ choices—qqqis significantly reduced (if not eliminated) by HIPAA, a law passed in 1996. If you had a job with health benefits and took a new job, HIPAA meant that the new employer’s insurer could not underwrite you for health status, or exclude pre-existing conditions, if you had maintained continuous coverage at your old job. (Most states had similar laws by 1996.)

So, some of the consequences identified as deriving from job lock are likely caused by other factors instead. For example, people with chronic illnesses are significantly less likely to switch jobs than healthy people. But the employer-based nature of health insurance itself cannot cause this, because the next employer cannot charge a newly hired, chronically ill employee a higher premium, or deny coverage for the chronic illness.

The real reason that chronically ill employees are more likely to stick with their current jobs is that they are more likely to fear other risks associated with getting a new job or fear that potential new employers can identify the chronic illness and draw back from hiring them (although, of course, the potential employer would never admit this).

The real problem with our employer-based health benefits is “insurance lock”. Until recently, and even now only for very large employers, an employee could get his health-insurance policy from only one insurer: The one chosen by his employer. And that one insurer seldom offers a choice of plans: According to the Kaiser Family Foundation/Health Research Education Trust Survey of Employer-Sponsored Health Benefits (2013), 87 percent of employers offered only one plan type (exhibit 4.1).

If you want to switch car insurance or homeowner’s insurance, you pick up the phone, get on the Internet, or see an agent. If you want to switch health insurance, you have to deal with someone in your HR & Benefits department who has a million other things to do and explain to her why you think the company should switch plans. That is no way to make friends in the HR bureaucracy.

The consequence is that insurers design plans that will satisfy the needs of the HR & Benefits staff, not the individual beneficiaries.

“Insurance lock”, not “job lock”, is the real problem with employer-based health care. And the way to fix it is not with Obamacare, but with a refundable tax credit that goes to every working-age American household.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.