Employer-Sponsored Health Insurance

Importance, Options, and Issues

Jeanne M. Lambrew, PhD Associate Professor

LBJ School of Public Affairs, University of TexasSenior Fellow, Center for American Progress

September 26, 2008

IMPORTANCEAs a Source of Insurance

• Spreads Out Risk– Job choices are rarely about health benefits– Most with job-based insurance are in large firms

• Leverages Demand– Greater negotiation power with strong providers– Innovates in delivery system organization

• Keeps Administrative Costs Low– Economies of scale– No underwriting, marketing – Easy collection of premiums

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Effects of Firm SizeFirm Size Adults

CoveredAdministrative

Costs

<10 8% 48%

10-24 8% 25%

25-99 12% 20%

100-499 13% 16%

500-999 5% 13%

1000+ 34% 10%

Public Employees 19% --

3Sources: EBRI analysis of 2008 CPS; JCT analysis of Bush health insurance tax deduction plan

As an Agent for Workers• Reflects workers’ preferences

– Part of attracting and retaining labor– Balance cost with sought-after benefits

• Employers care about cost, insurers about risk• Benefits have changed to reflect what people want

• Makes enrollment easy– Lowers time for workers to find health plans

• Most employers are trusted – Payroll deduction simplifies premium payment

• Employer contribution excluded from taxes– Worker benefits from pre-tax employer payments

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As a Source of Financing• Tax break leverages employer contribution

– $200 billion in tax breaks contribute to:• Over $500 billion in employer contributions• Around $200 in employee contributions

• Employer contribution acts like a payroll assessment : Most people unaware of it– May decrease awareness of premiums– May increase insurance coverage compared to

paying out of pocket

• System facilitates premium collection– Administrative costs would climb if insurers had

to collect premiums directly from workers5

OPTIONS Strengthening Employer

Coverage• Employer requirement

• Employer pay or play– “Pay”: Typically a payroll tax, could be a

percent of premiums– “Play”: What constitute minimums

• Individual requirement– Increases take-up of employer coverage,

according to Massachusetts experience

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Preserving Elements of Employer Coverage

• Financing– Corporate tax– Payroll tax

• Pooling– Workers access pool options via employers

• Facilitating coverage– Employers deduct health premiums from wages– Employers arrange for health plan choices

without sponsoring them

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ISSUES• Small businesses face special challenges

• Alternatives to employer system needed– Many have loose labor-force attachment– Employment patterns changing

• Alternatives matter– Eligibility rules– Generosity of benefits, premium affordability

• Reminder that large firm coverage functions:– Better than small group and non-group coverage– Similar to large public programs

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