Health Care: Why is Employer-Based Insurance So Popular?

InsureBlog links to a post at Trusted.MD on the entirely unsurprising fact that most employees are satisfied with their employer-based health insurance. The post contains the following rather trite observation:

Employers don’t actually pay for health insurance. They simply redirect a portion of their employees’ wages directly to the insurance carrier. Since employees never get to see this princely sum, they aren’t taxed on it.

The blogger then misses the point of his own assertion and accuses the employees in question of being to dumb to know what’s good for them:

It means that folks have a warped perception of how insurance really works, and are willing to give insurers more money … for coverage that they may never need or use.

This is not only patronizing, it is inaccurate. The “average Joes,? as he calls them, like their employer-based insurance precisely because “they aren’t taxed on it.? They are merely responding to the perverse incentives created by the tax code.Which brings us to the real problem. I agree that our system of employer-based health insurance needs to be changed, but that will only happen when our alleged leaders in

Washington revise the tax code to remove the perverse incentives that distort both the health care and insurance markets.

Comments 10

  1. hgstern wrote:

    First, thanks for the link!

    Second, looks like I’m not the one who “misses the point:”

    Since the employees in question are the ones who, ultimately, pay the premiums, they are the ones who are most affected by the wasteful use of premiums.

    BTW, this is not a “trite observation,” nor is it “inaccurate. Rather, it is the factual representation of the system as it currently exists.

    It’s also rather presumptuous of you to assert that I called “average Joe’s” dumb; in fact, most folks covered under employer plans have little (if any) voice in which benefit configuration(s) their employer chooses. Since this is the case, there isn’t a lot that “aJ’s” can do about it. Doesn’t make them dumb, just ill-informed.

    Nice try, though; keep playing, and someday you may “get it.”

    (PS: It’s not so much that I “linked to a post at Trusted.MD:” I actually penned it)

    Posted 15 Apr 2007 at 4:21 pm
  2. Catron wrote:

    You’re still in the weeds. The rubber hits the road with the following phrase: “they aren’t taxed on it.? These “average Joes? have caught on to something that evidently eludes you: any savings they might accrue by following your advice would be eaten up by the taxes they would pay pursuant to the marginal increase in income.

    So, these folks are smarter than you think. But, again, the point is that the tax code encourages them (and everyone else in the system) to make choices they would never make in a market undistorted by federal interference.

    Posted 15 Apr 2007 at 8:40 pm
  3. hgstern wrote:

    Very clever:

    “You’re still in the weeds.”


    “The rubber hits the road”

    You forgot:

    “Nanny nanny boo boo!”

    But this is the gem:

    “any savings they might accrue by following your advice would be eaten up by the taxes they would pay pursuant to the marginal increase in income.”

    What advice, pray tell, have I given? I merely pointed out that employees in group-sponsored plans are kept ignorant of the true costs of coverage.

    Sounds like projecting to me.

    Posted 15 Apr 2007 at 9:45 pm
  4. Catron wrote:

    You may want to go back and read your own post, particularly the passages in which you aver that employees “are willing to give insurers more money for coverage that they may never need” and will continue to choose such plans “over increased take-home pay.” Such assertions clearly imply that you would advise them to do otherwise.

    Posted 16 Apr 2007 at 8:24 am
  5. Diora wrote:

    What seems to be missed in this and other posts is that employer-based insurance is a group plan. Yes, it means healthier and younger people are subsidizing older people, but since all of us get older and sicker, it means that what we pay in our salaries while we are young we are likely to get back when we get older. Without this type of plans, many a young person would say “I am healthy, I don’t need insurance”, while older people will have to pay huge premiums, and some will not be able to get insurance at all.

    In addition, when you buy anything in bulk you are likely to get cheaper prices. When an insurance company gains many customers at once it is likely to reduce premiums.

    Moreover, an insurance company can refuse to renew an insurance for an individual. When an individual is a part of a large pool, the insurance company has no such option.

    At least in large companies this works well. Yes you are paying with reduced salary, but at least you know that your insurance will not throw you out. You can loose your job, but then you still have COBRA..

    Posted 17 Apr 2007 at 9:25 am
  6. Catron wrote:

    Excellent point. Another reason why the employees are not quite as “ill-informed” as Stern suggests. They are just responding to the incentives.

    I do, however, think that employer-based coverage tends to contribute to excess demand. I favor a coverage model that emphasizes higher deductibles (to reduce frivolous ER and PCP visits).

    Posted 17 Apr 2007 at 12:30 pm
  7. hgstern wrote:

    Actually, it is an erroneous point: individual plans may *not* be non-renewed (except for fraud or material misrepresentation, in which case they are ‘rescinded’). So that’s dispensed with.

    Another misconception is that group plans offer lower rates. Nothing could be farther from the truth: for comparable benefits, and assuming reasonable health, individual plans are *less* expensive than group cover. (That just stands to reason, btw: group plans are subject to more stringent requirements, among them being guaranteed issue of coverage and maternity)

    Finally (and I realize that this is in reverse order), there is the rather curious hypothesis that “what we pay in our salaries while we are young we are likely to get back when we get older.” That’s just wrong (cf: Social Security)

    As to your points, Catron, well you and I are not so far apart as you seem to believe: it is my contention (and it seems to me to be perfectly clear in the column) that employees *are* responding to incentives, because they are unaware (i.e. mis-informed) of alternatives. Because of the tax advantages which accrue to group plans (vs individual ones), the employee would pay additional opportunity costs by going outside the plan.

    And, as you correctly conclude, since he’s paying for the richer benefits anyway, there’s no reason *not* to over-utilize. Again, nothing in my post states or implies otherwise.

    Actually, I’ve enjoyed this little debate, and appreciate the opportunity (and, of course, the link). Have a great rest of the week!

    Posted 17 Apr 2007 at 11:35 pm
  8. Catron wrote:

    I think you’re probably right (Stern) that we’re not that far apart philosophically. Thanks for your comments.

    Posted 18 Apr 2007 at 1:57 pm
  9. Diora wrote:

    Catron you have a point about overuse of resources. This is why many large companies are slowly moving away from HMOs to PPOs which have average deductibles and co-insurance based on percentage of the cost instead of fixed deductible. Our company did it a few years ago. Yes, I know it is a single company, but it is one of the larger Fortune 500 companies, and it regularly surways benefits of other employers in the field to make sure it pays competitively and provides comparable benefits. So it should be similar to what other employers in the field. Even if many companies still offer HMOs, they would probably move away from them as well since they seem to be expensive (at least according to my employer).

    Large employers also have an advantage of bargaining power. For example, some years ago a popular HMO refused to pay bills (on a technicality) from a local medical group for several retirees – my mom was one of them – who actually had individual plans. Shortly thereafter, the medical group sent a letter to all patients saying that it stops taking all plans of this company, including all group plans (I had one of those). There are several large employees in the area, and this insurance company was popular. In most large companies you have a choice of plans and you can change once a year. Shortly before the next decision period, the insurance company agreed to pay.
    If you are an individual, most insurance companies don’t care if you switch to another one. If it’s a matter of thousands or tens of thousands, it’s a big deal.

    Individual plans may be cheaper for 20-year olds, but does it hold true for the middle-aged? You also need to compare the benefits – how wide is the network? what is covered?, etc. Also, reasonably good health is transient. You don’t know when you might get a serious illness. With an individual plan you may not be able to afford insurance exactly when you need it most.

    I wouldn’t compare social security with employer-based coverage when talking about averaging of risk. With Social Security you pay for many years for 0 benefits now in hopes you may get “something” much later with the government as a manager, and the number of older people increasing faster than that of younger people; in employer-based coverage young people still get benefit, and some of them get to use it a lot too. Your benefit/cost ratio chages gradually and a lot sooner so you don’t need to wait nearly as long before you take advantage of the shared pool. In fact, you may just need it when you are still young. The ratio of older vs younger employees is also very different for employers, since they only provide coverage until you retire; at least since most companies stopped providing coverage to new retirees.
    And it’s not like our salaries would automatically increase if the companies stop offering insurance. They will still pay as little as they can get away with and still get good people. At least in current economy I don’t see people who don’t get insurance (e.g. contractors) making that much more. And by the way, many contractors I know are more than willing to give up their higher salaries for the employer-based medical.

    Posted 18 Apr 2007 at 4:15 pm
  10. Diora wrote:

    Oops, in the first paragraph above, when I said “of the cost instead of fixed deductible”, I meant “instead of a fixed co-payment”.

    Posted 18 Apr 2007 at 4:17 pm

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