The specific mechanisms of the aff solve job-lock

Close to half of all Americans receive health insurance coverage through their jobs. In no other major country is health care coverage tied as closely to employment as in the United States. American-style ESHI has several major unintended consequences.38 One problem is “job-lock” * the reluctance of many workers to move to a more suitable job, to become self-employed, or to start one’s own business for fear of losing insurance coverage. Even in other countries like Germany where employers play a role in health insurance, special measures exist to ensure that transition from job to job; from a job to self-employment; or from work to nonemployment does not interrupt coverage. The severe inequity of EHSI is a second problem. Health insurance benefits are tax-deductible, but the deduction is of greater value to people in higher tax brackets. The inequity is amplified by the fact that higher-paid workers are far more likely to get health benefits to begin with. According to data from the Social Security Administration, fewer than 20 percent of workers in the lowest quintile of the wage distribution get health benefits compared to more than 80 percent in the highest quintile.39 Robert Kaestner and Darren Lubotsky, economists at the University of Illinois, Chicago, estimate that workers in the bottom fifth of the family income distribution get annual tax benefits of less than $500 from ESHI, while those in the top fifth get benefits averaging $4,500. What is more, their data show that the inequity has become worse over time.40 A third problem is that the existence of thousands of ESHI plans, some of them quite small, adds to the fragmentation of the U.S. health care system and contributes to high administrative costs. As discussed earlier, although ESHI is nominally part of the private sector, it is by no means a creature of market forces. Inasmuch as it allows employers to pay a part of their labor cost as tax-deductible health benefits, the tax deductibility serves as an implicit wage subsidy. The benefits of the subsidy are presumably split between employers and employees according to the elasticity of demand for labor in various submarkets and according to the tax status of employees. However, the fact that the carrot of the deduction is backed up by the stick of the employer mandate clouds the picture. Although the mandate is apparently not binding on many employers, where it is binding, it is clear that the cost to employers of offering ESHI outweighs the value of the implicit subsidy. That possibility presumably lies behind the gradual decline in ESHI coverage. Any way one looks at it, it is hard to see any overall public policy justification for a program that primarily benefits high-wage employees while undermining labor mobility and adding to the fragmentation of the health care payment system. Any serious health care reform proposal should aim to eliminate ESHI once and for all. However desirable, the transition away from ESHI will not be easy. In part that is because a strong majority of beneficiaries who receive ESHI say they are satisfied with their coverage. In part, that is probably because many workers have little chance of getting other coverage, have no interest in changing jobs, or are on the favored end of the unequal distribution of tax benefits. In part also, it may be because workers do not understand that their cash wages would be likely to rise if EHSI were removed from the cost of labor. The experience with the ACA shows that reformers need to act cautiously in demanding that people change their health plans. A transition that induced people to move voluntarily onto UCC because they find it attractive would presumably be more politically acceptable than one that pushed people from ESHI to UCC by fiat. One way to make the transition from EHSI to UCC as voluntary as possible would be to lift the employer mandate, phase out the tax deductibility of EHSI, and allow employees to opt into UCC if they chose. Most lower-paid workers would probably take that option. Employers who wanted to use health care benefits to retain higher-paid employees could offer them supplemental policies to cover out-of-pocket costs, but without the tax deduction. That way many fewer people would be forced to make a change of plans against their will. Whether voluntary or compulsory, any transition away from EHSI would also have to decide what to do about the 20 percent of national health care costs that are now paid by employers. If ESHI disappeared, to be replaced with UCC, much of what is now spent by employers on health care would be passed through to employees as increase in cash wages, and some, perhaps, to business owners as increased profits. In that case, the federal budget would recapture some of the 20 percent through an increase in income tax revenues.