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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