ABCs of Healthcare and Reform

Who Really Pays for Employer-Based Health Insurance?

The majority of Americans get their insurance through an employer - their own, their spouse’s, parent’s, or other household members'. Typically, employers pay part of the premiums for these plans, and the employees pay the rest.

However, working people actually bear the costs for healthcare for themselves, their families, and their communities. Employer-sponsored health insurance, whether or not the company "pays" for it, is part of the total compensation for employees' work. The only meaningful difference between individually-purchased plans and employer plans is that, with employer plans, the employees turn over the processes of health insurance shopping, negotiations, and purchasing to their employers. A company--which can pool insurees and obtain discounted group rates--usually gets better prices and coverage than the employees might obtain on their own.

Employees pay for healthcare insurance, and healthcare expenses, in several ways:

• They pay their healthcare providers directly out of their take-home pay, through co-pays, deductibles and fees for services that are not covered by insurance.
• Some pay by buying individual health insurance out of their take-home pay.
• Many pay all or a share of the premiums for employer-sponsored health insurance, usually as pre-tax deductions from their salary.
• They pay various taxes as deductions from their salary that go to Medicare, Medicaid, federal employees', military insurance and veterans' care.
• They pay by accepting a lower wage or salary in return for their employers’ paying part of the premium as a benefit.

From an economist's viewpoint, however healthcare payments are made, employees ultimately bear the full costs, either directly or indirectly. The method of payment can influence these costs because every time money passes through someone else (an employer, an insurance company), there is a chance of adding costs without adding value (such as duplicative record-keeping and high administrative costs). In fact, the administrative costs of private health insurance plans grew over 400% between 1986 and 2006.

So even if your employer “pays” part of your insurance premium, that money is part of the total compensation for your work. Some employers even make this explicit in year-end total compensation statements that show health insurance premiums along with wages, salary, retirement, and other benefits payments. If a company "pays" for retirees’ insurance plans, that payment is subsidized from either a) its current operations (that is, from the work of current employees), or b) from a previously funded pension program that came from the compensation given to those retirees when they were still working.

There are numerous studies that show a trade-off relationship between healthcare costs and wages. On the level of any particular individual, these principles are not always clearly seen in practice. Below are some charts that show, or partly show, the relationships:

Cumulative Changes in Health Insurance Premiums, Inflation, and Workers' Earnings, 1999-2008

This chart shows that workers' earnings have kept pace with inflation (through 2008), but insurance premiums have grown more than 2 1/2 times as fast.

 

Benefits as a Share of Total Compensation for Selected Time Periods, 1960-2006, NIPA

This chart shows changes related to private health insurance and other benefits as their percentage of total compensation. Because each year's compensation is 100%, it does not show the changes in total compensation over that time. It shows private health insurance taking up a bigger share of total compensation over time.

 

National Compensation Measures as a Share of GDP, NIPA 1960-2006

This chart shows that private health insurance has taken up an increasing share of overall compensation since 1960. Because each year's total annual national compensation is reported at 100%, it does not show the changes in total compensation over that time.

 

Changes in Per Capita Health Expenditures and Average Hourly Earnings (Adjusted for Inflation), 1982-2005

This chart shows that larger increases in healthcare expenses are associated with smaller increases in wages, and, when healthcare costs increase at a slower rate, employees see larger increases in wages. It can take a year or so before higher prices affect insurance premiums, and then wages.

 

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