Haven never stood a chance. The nonprofit created by Amazon, Berkshire Hathaway, and JPMorgan Chase to tame costs and improve quality in job-based health insurance is floundering after more than two years of operations. Its problems stem from a flawed premise. The founding companies assumed that employer-sponsored coverage could be fixed with entrepreneurial energy and creative use of information technology. They were wrong. The cause of today’s dysfunction is misaligned incentives embedded in federal policy. The solution is a new law.
That realization may be why Atul Gawande — the Harvard professor, surgeon, and prolific author turned Haven CEO — announced recently that he was resigning his post with the venture to focus on the COVID-19 crisis (he will remain chairman of Haven’s board). His departure before launching any meaningful or scalable initiatives leaves the nonprofit’s future in doubt.
Job-based health care suffers from a collective action problem. Employers offer insurance to their workers as part of their compensation packages. Firms want to attract good employees, and so they have an incentive to offer high-quality health benefits. Federal tax law encourages generosity by exempting employer-paid premiums from workers’ payroll and income tax obligations. Because cash wages are fully taxable, compensation has shifted over time toward health care, with employers offering ever-more generous plans.
Expansive employer coverage contributes to system-wide cost escalation. Hospitals and physician groups organize their operations in part to appeal to workers covered by generous job-based insurance. When that coverage lacks meaningful cost discipline, the entire system becomes more expensive.
Over the years, many large firms have recognized this problem and tried to do something about it. There have been modest successes. But no single company is big enough to shift the culture of an entire medical services market. Moreover, most companies shy away from trying because they have to compete for labor and do not want to lose workers to firms offering better benefits.
Haven’s patrons are big companies but they are small relative to the size of the nation’s health system. They have a combined enrollment of 1.2 million people in their health plans, which is less than 1 percent of the nation’s population. Hospitals and other providers are not going to upend their business operations to please such a small slice of the market. Moreover, even a disruptive enterprise like Amazon is reluctant to impose constraints on its workers that do not also apply to the employees of other companies, like Microsoft.
The solution is a change in federal tax law that forces all employers to seriously grapple with cost discipline. The Affordable Care Act (ACA) attempted an answer in the form of the “Cadillac tax.” Job-based coverage remained tax-free for workers, but companies with high-cost plans were to pay an excise tax on premiums above specified thresholds, beginning in 2018. The business community, along with labor unions, fought the change from the moment it was enacted. Congress delayed it twice before finally repealing it altogether last year.
Companies thought they were strengthening job-based insurance by killing the Cadillac tax, but they actually weakened it. Rising costs have left workers frustrated with their private plans. The problem has been compounded by the COVID pandemic and the recession it precipitated. Millions of workers are now losing their jobs and their health insurance, in the midst of a public health crisis. Critics are wondering what is the rationale for employer coverage if it cannot control costs and leaves tens of millions uninsured in a downturn.
While they have a point, job-based insurance is worth saving because it is private insurance. The alternative is public coverage, such as through a public option plan. Public insurance relies on regulated payments to providers, usually by referencing Medicare’s fee schedules for hospitals and doctors. Medicare pays much less for services than commercial insurance, and is able to do so in part because private insurance helps hospitals and physician practices stay afloat. If the entire health system relied on Medicare rates, patients would have more difficulty gaining access for needed services. Delays in care would become more common.
Fixing employer coverage requires solving the collective action problem. All companies offering plans to their workers should comply with a uniform set of rules promoting cost discipline, high-quality care, and greater security for workers and their families. These rules -- outlined briefly below -- should be attached as conditions to the federal tax break for job-based health insurance:
- Consumer Choice and Private Exchanges. Instead of every employer contracting separately with health insurers and making coverage choices for their employees, workers should be allowed to choose their insurance from competing plans. They would pay whatever is not covered by their employers’ contributions. Private exchanges can operationalize this process by working with insurers and processing premium payments. The federal government should not create and run the exchanges but should instead require employers to use any private exchange that exceeds a minimum threshold of covered lives (perhaps a few million). This requirement would strengthen the ability of private plans to drive down prices for covered services.
- Health Plan Requirements. Insurance offered through the private exchanges should meet minimum requirements for covered benefits and care coordination. Their offerings should be standardized to allow consumers to easily compare premiums too. And they should facilitate price shopping by patients for certain services by using reference-based payments that provide incentives for low-cost, high-value care.
- Defined Contribution Payments. Employer premium payments should be in the form of fixed payments that do not increase with the expense of the plans chosen by workers. Employees would have strong incentives to sign up with coverage that offers high-value services at a low premium because they would have to pay more out-of-pocket for high-cost plans.
- Assistance for Laid-Off Workers. Health insurance needs to be reliable and durable, which means it cannot vanish when commercial enterprises struggle. Employers offering plans to their workers should be required either to continue their defined contribution payments for laid-off workers for a period of time, or to pay a tax that would allow states to pay for such contributions for eligible unemployed workers.
Haven has good intentions, and may yet produce some tangible results. But it will not transform employer-sponsored health care. The problem is far bigger than three companies, even ones with an instinct for disruptive change. They should band together with other companies and petition Congress to save job-based insurance before their workers give up on it.
James C. Capretta is a Contributor at RealClearPolicy and holds the Milton Friedman Chair at the American Enterprise Institute.
