A common refrain in today’s health care debate is that the United States is the only major industrial country without single-payer, government-run universal health care. Bernie Sanders deserves credit for making single-payer a topic of conversation, particularly when it’s not the key factor that sets the United States apart from the rest of the world.
As Stuart Butler of the Brookings Institute explains, “When I emigrated to the United States in 1975 from the UK, I was shocked to discover that my health insurance would be chosen and controlled by my employer. No other major country organizes health coverage in this way. I soon discovered why the United States is different. Employer-sponsored health insurance (ESI), which is actually part of my paycheck my employer earmarks for coverage, is treated by the IRS as tax-free compensation. If I use the same money to buy insurance myself, I pay tax on it.”
Health care is the biggest part of our economy and its costs are expected to increase in spite of reforms to make it more “affordable.” In 2016, $3.7 trillion in health care spending consumed 18 percent of our economy and that percent is expected to jump to 20 percent by 2025. Nothing has done more to drive health care inflation than the illusion that someone else is picking up the tab. It’s human nature and basic economics. When consumers are insulated from the real costs of a transaction providers and insurance companies overcharge while consumers overspend and overutilize. This phenomenon – also called the “third-party payer model” – is largely the creation of ESI, which itself is an accident in history.
In 1942, during the early days of World War II, President Roosevelt signed an executive order to prevent businesses from increasing wages to attract workers. Roosevelt was worried a hiring frenzy would trigger inflation just as the U.S. was leaving the Great Depression and gearing up for war. But businesses adapted and decided to shift wage increases into benefits for health insurance. A year later the IRS decided these benefits would not be taxed and ten years later Congress codified the policy after the IRS briefly waffled.
I recently asked a senior administration official who was deeply involved in negotiating the tax bill why the bill didn’t touch ESI, which at $3 trillion in revenue losses over the next decade, is by far the largest and most antiquated tax expenditure in the code. The official said economists on all sides know the ESI doesn’t make sense in today’s world but acknowledged the politics of the issue are “very difficult.”
That’s an understatement. Neither party is eager to talk about changing ESI but there have been serious bipartisan efforts at reform in the last decade. In 2009, U.S. Senator Ron Wyden’s (D-WA) “Healthy Americans Act” and the “The Patients’ Choice Act” offered by U.S. Senator Tom Coburn (R-OK) and U.S. Representative Paul Ryan (R-WI) both sought to equalize the tax treatment of health care.
Congress could have tackled ESI reform this year but didn’t. Scott Flanders, CEO of eHealth, called this decision an “enormous missed opportunity for American consumers.”
That’s particularly true for millennials in the 21st century economy.
ESI represents not just a transfer of wealth but also a transfer of economic freedom and personal liberty from the millennial generation to Baby Boomers. It’s a big scam no one is talking about. Health care policy is complicated but ESI is the golden thread that is the key to understanding the story of risings costs and declining choice. ESI is the rudder under the surface that’s steering a $3.7 trillion ship.
In today’s economy, using the tax code to discriminate against people who don’t get health insurance through their employer is indefensible. Millennials are now the largest generation in the labor force and surveys consistently show nearly half of millennials don’t expect to stay in the same job for more than two years. The contingent or “gig” economy is the new norm. By 2020, 40 percent of all U.S. employees may be contingent. The days of the typical employee spending their entire career with one company are long gone.
Acknowledging this reality won’t destroy ESI. In fact, because employees are comfortable changing jobs, employers have a greater incentive to retain talent than ever before. Employers will continue to offer health coverage and shrewd millennials can take that deal or ask for a better deal in the form of higher wages so they can shop for their own insurance. Nervous politicians have nothing to fear from a change that will make the entire system much more affordable and transparent. Consumers and voters will love them for their good sense and courage.
While the Tax Cuts and Jobs Act represents a missed opportunity to make real changes to the tax treatment of ESI, millennials should not be discouraged. The election of Donald Trump itself shows that unexpected things can happen in American politics and that political barriers can be an illusion. Millennials need not be trapped by the tax structures crafted by their grandparents nor the difficult political dynamics that paralyze their parents.
The reality is the year 2018 is a lot closer to 2042 than 1942. Millennials have the power to end this generational scam and create a future that works for them.
