• Clearing up a little confusion about employer-sponsored health insurance

    I’ve seem some comments that suggest that folks don’t get why employers offer health insurance today. After all, they argue, (1) it costs employers something to offer the benefit and (2) there is no penalty for not doing so. Actually, this is wrong on both counts.

    First, it doesn’t cost employers anything to offer health insurance. Every dollar of it comes out of wages workers would otherwise receive. I’ve been over this: here, here, here.

    Second, there is a penalty for not offering health insurance, it’s just not explicit. Workers want health insurance from their employer because it is the cheapest way to get it today. That’s true for several reasons: lower loading fees (equivalent to higher medical loss ratios) groups can command and the huge employer-based insurance tax subsidy. About the former, see this post. About the latter, see this and that. Employers who do not offer insurance are at a competitive disadvantage in the labor market relative to those that do, at least for attracting workers who want insurance, which is a large proportion of them.

    All of the above is why naive calculations about the cost and benefit of employer-sponsored health insurance are way off and why it won’t go away as fast as some think. That isn’t to say it won’t erode. It will, but it will be just that an erosion (slowly) not a rapid collapse.

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    • Yes, it is my belief that when healthcare was 5% of GDP it made great sense for employers to pay for it, but at 20% of GDP we need more eyes on the problem of cost control and more decision making in the hands of the consumers. The long slow painful solution has started, that is fewer employers paying for health insurance and those that do raising deductibles. It is painful but IMO it is a real solution. Government could help it along by taxing the premiums but that is politically impossible. People are fooled into thinking that the employers is paying and that the tax break benefits them.

      • @Floccina – “Government could help it along by taxing the premiums but that is politically impossible.”

        The compromise is the excise (Cadillac) tax. Will it be delayed or (further) watered down? I think there’s a good chance of that.