Commentary

Who Should Pick Your Health Plan?

By Greg Scandlen
August 6, 1999
I have a great barber. I’ve tried others, but I keep coming back to the same guy because somehow his haircuts just seem to last longer. And after years of disappointment I finally found an auto mechanic I trust, and there’s a plumber I know who always comes through, even on weekends. I’m a lucky man to have such reliable sources of help. All these people are good at what they do, and I wouldn’t trade them for anything. But I wouldn’t ask them to pick my health care plan. What do they know about health care, or insurance, or about my medical needs? Why would I rely on my barber or mechanic or plumber to choose a health insurance plan for my family?

The people who work for these guys must be wondering the same thing: “Here I am working for a plumber (or a mechanic, or a barber, or the local bank or the Toyota dealer), and he gets to choose my health plan. There’s something wrong with this picture.”

Indeed there is. In the United States, we’ve accidentally ended up in a situation where employers choose the health plan for their employees. In some cases, if the employer is big enough, the workers get to pick among several different plans, but in most cases (83 percent) there is no choice at all. Even when there is a choice, it is the boss who chooses the plans the employees get to pick from, but what does he know about health care? Exactly nothing. He’s in business to sell cars, fix sinks or give haircuts.

If the boss does pay attention, he looks only at the cost of the plan. He doesn’t look at whether there are good doctors involved or whether you can get a quick appointment, or how long you have to sit in the waiting room.

And he sure isn’t looking at whether your last surgery was done with state-of-the-art equipment, or how much pain you suffered in the post-op room or how quickly you recovered when compared with other people of your age and condition.

If you could choose your own plan, you would certainly pay attention to those things and if you weren’t happy, you would drop that plan and move to one you liked better. That’s how we make progress in this country — consumers decide they like “Plan A” better than “Plan B,” so the first one prospers and the other goes out of business.

But not in health care. In health care, the consumer has nothing to say about what the best health plan is. If you don’t like your health plan, you have to quit your job to get a different one. No wonder there is so much unhappiness and “managed care backlash” these days.

The only reason this situation exists is the federal tax law. Under current law, if your boss chooses the plan you get the value of the benefits completely free of any taxes — including state and federal income taxes and FICA. But if you go out on the market and choose your own plan, you get no tax advantage at all. Every penny you spend is taxed to the hilt. That difference in tax treatment makes it 50 to 100 percent more expensive for individuals to buy their own health coverage than for the boss to do it for them.

In other words, to pay for a $4,000 insurance policy, you have to earn only $4,000 if your boss buys the policy. But if you buy your own, you have to earn $6,000 in gross wages to have enough left over after taxes to pay for that $4,000 insurance policy (assuming 15% federal income taxes, 13 percent FICA taxes and 5 percent state income taxes).

There are some proposals before Congress that would begin to equalize this situation. They would provide tax credits to working people whose employers don’t provide coverage, similar to the value of the tax breaks provided to employer-sponsored health care. Employers might want to continue helping pay for the cost of coverage. They could spend the same money they do today to pay for the premiums, but they wouldn’t choose or operate the health plan. You would choose the plan that suited you best.

If these bills become law, people will no longer have to rely on a barber or a mechanic to choose their health plan.

Greg Scandlen is a fellow in health policy at the Cato Institute.