Hobby Lobby ruling is bad news for employer-based insurance

The Supreme Court inadvertently struck a blow against the employer-based health insurance system last week. On the surface, Burwell v. Hobby Lobby, decided 5-4 along ideological lines, involved an employer who didn't want to pay for insurance coverage for two forms of contraception, required under the healthcare reform law, it considered abortifacients. The high court's narrow ruling gave closely held firms such as Hobby Lobby the right to opt out of paying for services that violated their religious principles.

The underlying premise of Hobby Lobby's suit was flawed. The company's central claim that it pays for these benefits is wrong. Its workers are the ones who pay for employer-provided health insurance.

If there's one thing that has united economists over the years, it is that health insurance, when provided as an employee benefit, is a form of wages. In other words, a dollar spent on health insurance is a dollar that isn't paid in higher wages or other benefits—or retained by the employer as higher profits.

That's why most employers get terribly upset about rising healthcare costs. Year after year they must pay this form of higher wages without getting any kudos from their employees.

The government lessens the blow of these rising costs (and helps contribute to them, some would say) by giving a tax break for health insurance premiums. When wages are delivered in the form of pre-paid insurance premiums, they aren't subject to income taxes and the employer gets to deduct the cost as a business expense. This makes economists grit their teeth because it is a hidden subsidy that masks healthcare's true cost.

The Joint Committee on Taxation, in its annual tax expenditure report, estimated the health insurance tax exclusion cost the U.S. Treasury $132 billion in 2013. It is the single largest tax expenditure made by the government—greater even than the home mortgage interest deduction.

So Hobby Lobby and all other employers are not “giving” their employees health insurance with “their” money. They are intermediaries paying for this service with their employees' taxpayer-subsidized foregone wages. Employers are pass-through agents, just like insurance companies.

In the wake of the Hobby Lobby case, many more Americans will become aware of this economic reality. It certainly will be the case for every employee in a closely held firm—and estimates are that this encompasses more than half of all employed Americans with health insurance. Many today are probably wondering about their employer's beliefs and guessing how they might affect their health insurance policies.

Of course, there is a system in place for replacing this outmoded form of insurance provision, which only became widespread during World War II as a way to get around wage controls. It's called Obamacare.

Employers could pay their workers the wages they would otherwise have paid as health insurance premiums. The government could give the tax exclusion directly to the employees (with extra subsidies for those whose employers keep the windfalls, which could be paid for by extra taxes on those windfalls). Workers and their families could then use that money to buy policies that suit their needs on the exchanges.

It is society's obligation through its government to decide how these policies should be regulated and what they should contain. In the wake of Hobby Lobby, many more people will understand those aren't decisions that should be left to private employers.

Follow Merrill Goozner on Twitter: @MHgoozner