Unbiased Analysis of Today's Healthcare Issues

Should employers provide health insurance to their workers?

Written By: Jason Shafrin - Sep• 03•17

On this Labor Day, I want to address a fundamental question in the U.S. health care system: should employers provide health insurance to their workers?  I won’t take a stand on the issue but I will just list some pros and cons.  Wherever you stand on the issue, I recommend you carefully consider the arguments in favor of the other viewpoint, as there are valid points on both sides.

Employers should provide health insurance.

  • There is an equity argument that we want individuals to have health insurance
  • Employers are interested in getting people back to work so they are incentivized to make sure their workers have health care coverage that can get people back on the job.
  • For individuals who do not like government-run health insurance, pure individual-market health insurance schemes are problematic on equity grounds.  Sicker individuals have to pay higher insurance rates which often leads to their exit of the market.  Adverse selection death spirals can occur making individual market unaffordable.  The Affordable Care Act (ACA) “solves” this problem by prohibiting insurers to vary premiums by health status (community rating) except for some narrow ranges based on age and smoking status.  However, by failing to price insurance based on actuarial value, healthy individuals may leave the Obamacare market.  The ACA “solves” this problem through government subsidies, which can decrease individual out-of-pocket cost but impose a steep health care bill.
  • On the other hand, employer-provided health insurance is a natural pooling mechansim where insurance can be price at an actuarially fair value (for the group) and sick and healthy people can pool together.
  • Employer-provided health insurance has lower administrative cost than individual market because there is less effort needed to correctly price for an employer with 100 employees than for pricing each individual insurance plan separately.
  • The U.S. has a long history of employer-provided health insurance so there are some path-dependent reasons (e.g., easier to work with existing institutions) why employer-provided health insurance makes sense.
  • For workers, the tax deductibility of employer-provided health insurance is a bit benefit

Employers should not provide health insurance.

  • Employer provided health insurance is not equitable for those without employment.  A single payer system is more equitable.
  • If people get sick, they may lose their job and thus lose health insurance at exactly the time when they need it.
  • Large employers have the ability to set up human resource (HR) departments to research health plans and get a good deal as these fixed costs are spread out over more employees so the per employee cost is low.  For small and medium sized employers, picking a health insurance plan may be outside their core competency and the same (or similar) costs to set up these programs are spread over fewer workers.
  • Individual health insurance preferences are likely heterogeneous.  For instance, some people may prefer to spend less on health insurance and have more of their compensation in cash; others may prefer to have more of their compensation as health insurance.  Employer-based health insurance often limits employee choice of plan or may not allow workers who prefer less expensive insurance to fully recoup these cost savings in terms of additional salary.
  • The tax deductibility of employer health insurance imposes a large cost on the federal budget.  Further, the deductibility is regressive since richer individuals benefit more from this tax exemption.

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2 Comments

  1. G. E. Sparks says:

    Although I’m a layman in this area and admittedly unfamiliar with all aspects and implications, may I suggest a third option:

    Employers contribute the amount they would provide for employer-provided health care to an employee’s health savings account (HSA) and empower the employee to seek his or her own individual insurance.

    Of course, legislative changes are necessary to allow HSA funds to pay for premiums, and to increase the annual contribution limits. But doing so would put the employee in full control of their choice of plan and network and relieve the employer (regardless of size) of the burden of seeking and negotiating group insurance.

    Competition in the individual market would explode, reducing premiums for all. Employers might consider contributing HSA dollars to the accounts for their part-time and contracted employees where they don’t today. This would put the growing army of freelancers and independent contractors, as well as small businesses, on equal footing in their pursuit of health insurance. Concerns of some employers of funding plans with benefits that doesn’t align with their beliefs (e.g. Hobby Lobby, Little Sisters of the Poor) would be relieved.

    Employer-provided health insurance is a construct of the 20th century, one where employees worked at a single company for most if not all of their career. I think if there’s ever a time to challenge the “we’ve always done it this way” mindset, the time is now.

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