Employer Health Insurance: Often-Hated, Sometimes Pioneering, and Now on Amazon’s Radar

In the United States, most working-age people get their health insurance through work. It’s a weird, kludgy system, largely an artifact of history. Economists, politicians and workers alike complain that the setup is inefficient and maddening.

Now, three very big and powerful companies — Amazon, JPMorgan Chase and Berkshire Hathaway — plan to use that system to transform health care, at least for their million-plus combined employees.

This idea is not as revolutionary as it might first seem. Some experts view the employer health system, despite its flaws, as a force for innovation and reform. Aggressive employers have pushed for experiments in health benefits, and they have tested ideas that the government and private insurance companies have shied away from.

It was companies, not insurers, that began experimenting with paying extra for intense primary care for the sickest patients. Companies first developed on-site health care for their workers: Kaiser Permanente was born as a medical clinic for workers building the Colorado River Aqueduct. Companies, including Lowe’s and Walmart, pioneered programs that paid for patients to travel to premier centers for very expensive operations. California has tried tying insurance coverage to the price of a high-quality provider for state workers. Each of these efforts has been tied to measurable reductions in the cost of medical care.

“To the extent that you have seen innovation by insurers, it’s often at the behest of employers,” said Jonathan Kolstad, an associate professor at the University of California, Berkeley, who studies the industry.

The announcement Tuesday by Amazon, Chase and Berkshire, though short on details, generated a lot of hope and investor enthusiasm. There are reasons to be skeptical that the companies will be able to make a big dent in their workers’ health spending. But if the companies succeed, they will be harnessing the advantages and opportunities of a much-maligned part of American health care.

Companies started offering health coverage broadly during World War II, when the government imposed wage controls. And the system was cemented when the Internal Revenue Service decided that health insurance was not subject to income taxes, making it a particularly valuable way for employers to improve compensation for their workers.

Critics point to numerous problems with the system: It relies on company leaders to pick health insurance for all workers, even though C-suite executives might have preferences different from their lower-wage employees. It diminishes incentives to reduce costs, by insulating workers from the full price of their benefits. It discourages changes that could displease even a small number of workers, creating incentives to minimize disruption. “I don’t see any reason for the employer to be doing this,” said Fiona Scott Morton, a health economist at the Yale School of Management.

But the employer system also has points in its favor. For one, proponents note employers have multiple incentives to get health insurance right. They want their workers to be happy with their full slate of compensation — an employer that offered deceptive plans, for instance, might not hold onto good employees for long. Employers also want workers who are healthy and productive, able to work hard and to focus on their work.

Employers tend to be insulated from the political considerations that can make it hard for government plans or large insurers to try new strategies.

Large companies are able to pool risks, since they tend to cover both healthy and sick employees and family members. Because employers pay a large share of insurance premiums, most workers tend to sign up for plans even if they’re healthy. Employers with people who stick around a long time — think police departments or universities — have an additional incentive to prevent their workers’ health from deteriorating over time.

Insurance is also very hard for individuals to buy. A long list of studies has shown that consumers struggle to understand basic insurance concepts like deductibles, have difficulty selecting a good health plan, avoid shopping, and often choose a plan that is clearly inferior to other options.

Large employers have the resources to hire human resources professionals and benefits consultants to shop for their health plans. At least theoretically, those people should know more about how to pick a good health insurance plan that will serve the needs of the company’s workers. And the bigger the companies, the more they can pay to hire people really good to do that work, since their salary gets split many times over.

Have employers used these advantages to find huge savings? Not overall. Employer health insurance tends to be more expensive than public insurance, and its growth has traditionally followed the trajectory of other parts of the health industry. Some employers simply select from standard offerings, essentially outsourcing any innovation potential to notoriously risk-averse insurance companies.

But there is also a robust history of employer experimentation. Some employer ideas have paid off — and spread. Others have flopped. Amazon and friends would be building on this tradition.

Arnold Milstein, a professor at Stanford Medical School, spent several years with the benefits consulting firm Mercer developing unconventional benefit products with companies.

“There is a segment of them that is willing to take the same risk tolerance that characterizes their core business and move it into the health benefit space,” he said, noting that many employers “are pretty wary, but there is a subset that has been more bold.”

There have been less successful innovations. Workplace “wellness” programs, which provide financial incentives for lifestyle changes, were initially built and bought by employers. But a growing body of evidence suggests they haven’t delivered much in the way of results.

Amazon, Chase and Berkshire Hathaway have said they’re experimenting with new health care models for their workers. If they crack the notoriously hard nut of high health care costs, we can thank the country’s weird and unloved employer health system for their discovery.