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Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International

Document Type


Publication Date

Summer 2015




Yale Law School




In the employer-sponsored insurance market that covers most Americans many workers are “underinsured.” The evidence shows onerous out-of-pocket payments causing them to forgo needed care, miss work, and fall into bankruptcies and foreclosures. Nonetheless, many higher-paid workers are “overinsured”: the evidence shows that in this domain, surplus insurance stimulates spending and price inflation without improving health. Employers can solve these problems together by scaling cost-sharing to wages. This reform would make insurance better protect against risk and guarantee access to care, while maintaining or even reducing insurance premiums.

Yet, there are legal obstacles to scaled cost-sharing. The group-based nature of employer health insurance, reinforced by federal law, makes it difficult for scaling to be achieved through individual choices. The Affordable Care Act’s (ACA) “essential coverage” mandate also caps cost-sharing even for wealthy workers that need no such cap. Additionally, there is a tax distortion in favor of highly paid workers purchasing healthcare through insurance rather than out-of-pocket. These problems are all surmountable. In particular, the ACA has expanded the applicability of an unenforced employee-benefits rule that prohibits “discrimination” in favor of highly compensated workers. A novel analysis shows that this statute gives the Internal Revenue Service the authority to require scaling and to thereby eliminate the current inequities and inefficiencies caused by the tax distortion. The promise is smarter insurance for over 150 million Americans.

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