Employer-sponsored health insurance is increasingly unsustainable.
Congress should shift the tax advantage from employers to employees to empower patients.
E mployers are projected to face a nearly 8 percent jump in costs for providing health insurance to employees in 2025, marking the highest increase in their health-care spending in over a decade. Since 2017, the costs of employer-sponsored health insurance have increased by a cumulative 50 percent, driven by inflation, rising prescription drug costs, the increasing burden of treating chronic conditions such as cancer and cardiovascular disease, and the cost of regulations. These costs hit workers and consumers hard.
The out-of-control health-care spending spotlights the flaws of federally-facilitated, employer-sponsored health insurance, which limits competition and inflates health-care prices for everyone.
The employer-sponsored insurance system, a relic of World War II-era wage freezes, continues distorting the U.S. health-care market. Tax-advantaged employer payments for employees’ insurance were implemented to circumvent wage controls, and to attract and retain workers. After the war ended, wage freezes were repealed — but the tax advantage for employers was not.
With the wage freezes gone, health-insurance payments should have been restored as employee compensation so employees could choose how to use their hard-earned money. However, with the tax advantage to employers remaining intact, the funds continue to go to insurance and not to the workers. The system has ballooned into an inefficient approach that inflates costs and reduces consumer choice. If the tax advantage were transferred from employer to employee, this would expand the usefulness of these funds to pay for medical expenses.
Employees believe “employer-supported health insurance” is a benefit provided by the employer, not what it truly is: Money rightfully theirs that is denied to them. About 165 million Americans rely on employer-sponsored health insurance, but workers have few choices beyond what their employers offer. Employer-sponsored insurance ties up at least $1 trillion in annual health-care spending that could be paid directly to employees, or placed pre-tax into Health Savings Accounts (HSAs) for workers to control themselves.
As of 2023, employers’ average cost of family health insurance reached a whopping $23,968. While this exclusion saves workers from paying taxes on this amount, it also forces them to accept plans that may not meet their needs. It also disallows them from shopping for better, more affordable options. Put simply, a worker paying a 33 percent tax rate avoids paying about $7,910 in federal taxes on a family-plan premium. This tax break hides the reality that employer-sponsored insurance stifles competition, driving up costs across the system, and is really compensation denied.
Employers must absorb ever-increasing costs, along with employees who pay co-pays and elevated deductibles. In 2025, these costs are expected to rise by 8 percent, with much of the increase driven by pharmacy spending, particularly for GLP-1 medications used to treat obesity and diabetes. This pharmaceutical spending has grown to consume 27 percent of health-care budgets, up from 21 percent in 2021. While these medications could reduce health-care cost over time, we don’t have evidence of it yet.
This system inflates health-care costs by encouraging over-insurance, where employer-sponsored plans cover more than workers need, and limits the free market’s ability to drive competition and lower prices. A free-market approach would allow individuals to shop for health insurance as they do for any other product or service.
Moreover, while employers try to manage these rising costs through plan adjustments, cost-containment strategies, and vendor partnerships, these efforts barely address the underlying problem. The employer-sponsored insurance system keeps workers from making health-care decisions and forces them into federal one-size-fits-all plans that may not provide the best value or coverage for their needs.
Congress should shift the tax advantage from employers to employees to empower patients and allow them to place these pre-tax dollars directly into their HSAs for expenses related to health care. This would introduce market competition, since workers could control their spending. Individuals could shop for care and insurance, forcing sellers to compete for their business. Introducing competition would drive down prices, improve care service, and allow consumers to make informed choices that reflect their needs.
This would bring true transparency to health-care pricing as individuals spend their money, creating downward pressure on prices. Empowering patients to make health decisions would help cure America’s critically ill health-care system.
By restoring American workers’ right to spend their money, we would increase choice, lower costs, and further incentivize health-care providers and insurers to improve services. Shifting to a consumer-driven model through no-limit HSAs is a crucial first step to fix the system.
Employer-sponsored health insurance is increasingly unsustainable. As employers (and many employees, too) brace for a large increase in health-care costs in 2025, the need for reform is critical and immediate. By giving workers control of their $23,968 hard-earned money, we can unleash the power of the free market to empower patients and revitalize a failing health-care system.
Vance Ginn, is president of Ginn Economic Consulting, host of the Let People Prosper Show, and previously chief economist of the Trump White House’s OMB. Follow him on X.com at @VanceGinn. Deane Waldman, M.D., MBA is professor emeritus of pediatrics, pathology, and decision science; former director of the Center for Health-care Policy at Texas Public Policy Foundation; former director of the New Mexico Health Insurance Exchange; and author of twelve books, including multi-award winning, Curing the Cancer in U.S. Healthcare: StatesCare and Market-Based Medicine. Contact him at www.deanewaldman.com.