The Insurance Problem - Part I

Now that President Obama has changed his rhetoric from reforming health “care” to reforming health “insurance,” you any be asking yourself what insurance reforms are needed.

If, like about 60% of Americans, you receive your health insurance as a condition of employment you are in a fortunate majority. And, in most states, if you work for a company with more than 50 employees you are not subject to pre existing condition limitations or recession of your coverage.

Your employer probably bears some of the cost, and because of laws put in place during WW II, you do not have to pay taxes on this compensation. Yes, compensation; your employer deducts the dollars paid for your insurance as a business expense just as is done for your cash compensation. But because of the WWII legal exemption, you don’t pay taxes on what your employer pays. And because of the employer contribution the amount deducted from your paycheck is less than the value of your insurance.

But, if you are in the other 40% of Americans, you either buy your insurance in the individual market with dollars you have had to pay taxes on or you go uninsured (unless your fellow taxpayers pay your costs under Medicare or Medicaid). So, which part of health insurance needs reforming and who should pay for the “reform?”

Let’s start with the majority of Americans. And let’s assume you work for an employer large enough to “self insure” (usually 200 or more employees). This means that the employer retains the liability for your health care costs rather than buying an insurance policy. Why would an employer do this? First of all, by assuming the risk, your employer avoids paying an insurance company a “risk charge.” This lowers the overall cost of the group policy.

Even more importantly, by “self insuring,” your employer, under ERISA (a federal law), is exempt from state mandated benefits. This is especially important for employers who need to have a single plan design for multiple locations in several states. Otherwise state mandates would result in different plans depending on where you live. Here’s why. In many, if not most, states, special interest groups have lobbied the legislatures to mandate that their “services” are covered in any insurance policies issued in the state. It doesn’t matter if you want the coverage, or if your employer wants to include the coverage in your policy; if it is mandated, you have to have it and that adds to cost. ERISA exemption means your insurance costs are not inflated by these special interests.

Your problem is that if you lose your job, or want to change employers, you risk losing your coverage. That’s really your “insurance” problem.