Earnings

The Healthcare Con: How Health Insurers Are Hijacking Workers’ Wage Gains

By Philip Cornell

Introduction

American workers typically receive health insurance from their employer, a system that has been ingrained in our society since WWII. But this concept is outdated, and there are two significant reasons why the system  needs to change.

First, employer-provided healthcare has allowed, if not facilitated, an exorbitant increase in health insurance costs, without a commensurate increase in benefits or better healthcare outcomes. No doubt, this is in part because the principal buyer of the good is not the receiver of the good. Thus, the real costs are somewhat obscured from the end consumer.

Second, dual earning American households lose out on savings When family healthcare is selected by one member of a dual-income household, the business of the other earner saves money, but the savings are not passed on to the household.  

Ultimately, we believe employers should not pay healthcare companies. Instead, they should give this money directly to their employees to buy their own healthcare. The reasons for this proposed shift are explained in detail in this article.

Section 1:

Asymmetric Information Leads to Rising Healthcare Costs and Stagnant Wages

Healthcare costs have risen to historic levels and show no sign of abating. In 2019, employees with employer-provided healthcare had premium contributions that were three times(1) higher than in 2001. Employer contributions — the premium amount the business pays — have also gone up 2.3 times.(2) Moreover, the health plans of today’s workers are covering fewer expenses than in 2001. The average deductible — the amount an individual must pay before insurance covers anything – has gone up a staggering 4.5 times during this same period.(3) In all, both employees and employers are paying more for healthcare plans, and these plans now cover fewer medical expenses.

Cost Increases in Healthcare Premiums

Full Premium Cost (Employee + Employer Contributions)

When health insurance is employer provided, the insurance companies have the leverage. The insurance industry benefits from the fact that the person paying for the product (employer) is not the same as the person receiving the product (employee).

Using a single year to illustrate the broader trend, from 2009-2010 healthcare premium costs increased by about 10.7%.(4) To cover the expense, employers could assume the increase, have employees cover it, or take other steps, for example, downsize their workforce. Facts suggest that employers generally combined these options. In 2010, 875,000 less private-sector employees(5) were in the workforce than the year prior. But employers also generally covered the health insurance price increase for the remaining workforce. The cost of healthcare for the employer increased by 4.1%.(6) Meanwhile, worker pay only increased by a dismal 0.9% that year – not even enough to keep up with the 1.6% inflation.

This phenomenon is not industry specific. In fact, we saw similar trends across diverse industries. In the production sector,(7) employer costs for healthcare went up 4.8%, while employee wages only went up 1.1%. Health insurance costs for an employer in the natural resources, construction, and manufacturing sector (NRCM) rose 2%, while employee wages in that sector didn’t move at all.(8) Outside blue-collar jobs, results were similar. For sales and office (SaO) occupations, employer costs for healthcare went up 4.9%, while wages went up a meager 1.4%. In all these sectors, while premium costs rose, the corresponding policies covered fewer expenses. Average deductibles in production, NRCM, and SaO went up by 26%, 8%, and 8.7%, respectively.(9)

Percent Change in Employer Costs for Healthcare and Wages by Industry

2009-2010 (Quarterly)

Throughout the last 20 years, workers have generally received the same level of healthcare (or worse), while they’ve seen an increase in out-of-pocket healthcare costs and have realized little earnings growth. Meanwhile, insurance companies have benefitted from higher premiums.

Section 2:

Double Paying for Healthcare Leads to Family Income Loss

The second major problem with employer-provided healthcare is the savings that dual-income households lose to the current system. For workers who choose their spouse’s health insurance plan, they are saving their own employer thousands of dollars but not receiving any of these savings.

In 2018, nearly all businesses (99% of large and 97% of small firms) that offered employee health benefits extended those offers to the spouses and children of their employees.(10) These percentages have remained largely unchanged for the last two decades. While this seems positive, consider what it means for household versus business budgets.

In each year since 1997, 52-58% of American households were dual income,(11) and this increases to 66% for households with children. Additionally, 77% of American couples are on the same health insurance plan.

Take Amy and Barry, a married couple from Ligonier Pennsylvania.(12) Both Amy and Barry’s jobs offer health insurance. Barry is a public-school teacher whose teachers’ union has managed to secure great healthcare. Barry opts into the employee-plus-one plan to cover both himself and his wife, and Amy opts out of her company’s insurance. Barry has a higher contribution because his plan is covering two people, and his employer, the school district, also has a higher contribution. Amy has slightly better coverage than she might have had through her own job, but the real winner here is Amy’s employer, because it saves the entire cost of what it would otherwise contribute to Amy’s premium.(13) Amy’s employer is well aware of this cost savings, so it incentivizes her to drop its plan by paying her $100 a year, less than 1/50th of what she is saving the company.

In 2018, 13% of employers offered minimal extra compensation if the employee chose his or her spouse’s coverage.(14) But the real gains from employees choosing a spouse’s coverage go to the business. For an American household with two earners, this translates into a loss of about $5,438 a year in potential earnings. This is roughly 8% of the median family income in the U.S. and should be enough to cover an average family’s annual food budget.(15)

Section 3: 

Potential Solution and Implications: Directly Pay Workers’ Healthcare Costs

To begin to consider solutions, we first must understand why employer coverage is a norm. It started to become commonplace during WWII. With the Stabilization Act of 1942, the federal government enacted a wage freeze to ensure the labor supply could support the war effort. Companies were forced to compete for workers by providing other benefits, in particular health insurance.(16) But there is no wage freeze today, and we are not in the throes of a global war. Employer-provided health insurance is a remnant of a fix to a problem we no longer face.

We face different quandaries today, namely wage stagnation and rapidly rising healthcare costs. To mitigate the onus on workers, businesses should pay workers their total compensation to include the portion that’s currently directed to insurance companies for healthcare premiums. Medical care is a human right, but so are many of a typical worker’s expenses. For example, adequate nutrition is a human right, but we don’t expect employers to buy groceries. We instead expect employers to pay workers enough to buy their own groceries. Grocery stores are more incentivized to keep prices low because the person buying the product is the same person receiving it. This should also be true for healthcare companies.

Paying workers their full compensation has multiple benefits. Many employers offer only one insurance company’s healthcare plans, thereby restricting their workers to choosing plans within one company. Allowing workers the freedom to choose between different healthcare options should lead to greater competition in the healthcare industry, driving down prices. Further, there has been a consolidation trend among healthcare companies,(17) which drives up costs for consumers.(18) Giving workers the ability to select between plans at many different companies could help reverse this monopoly trend and achieve a lower equilibrium price.

Moreover, paying workers their full compensation brings to the forefront increasing health insurance costs, which are currently shrouded because employers pay for a large part of the plans (as covered in Section 1). When the full sticker price of healthcare is revealed, potential consumer outrage could cause insurance companies to lower prices.

Lastly, this plan is feasible and complements current healthcare institutions. The largest program to help Americans afford healthcare is the Affordable Care Act. The ACA provides a subsidy if health insurance premium costs exceed a certain percent of a household’s income (approximately 9.5%). Unfortunately, ACA benefits are not currently available if you or your spouse qualify for employee-provided healthcare. If workers lose their job, they must navigate a healthcare marketplace in which they have no experience while trying to find a new job. During this time, unemployed workers are entitled to Continuation of Health Coverage (COBRA). But COBRA limits people to the health plan they had while employed, with the caveat that they are likely expected to pay the full price without their former employer’s contribution. How are they expected to pay this full amount without a job?(19) Instead, if workers were paid directly for health insurance, a layoff would mean continuing with their self-selected plan and applying for the ACA subsidy.

A reasonable concern would be that without employer-provided healthcare, workers might not purchase any coverage, increasing the ranks of the uninsured. Real-world data suggests otherwise. In 2019, the individual mandate was revoked, allowing people not to purchase healthcare and without a fine. Even though people were no longer forced to buy insurance, there was little change in the number of uninsured; 10.9% of people were uninsured, the exact same amount as 2015, and only 0.5% higher than 2018.(20)

Family healthcare premiums now average more than $20,000 a year across the country. Right now, that cost is somewhat hidden, with part paid by the worker and part by the employer. Paying workers their total compensation would make the health insurance system much more transparent and benefit the American family budget bottom line.

September 28, 2021
  1. https://meps.ahrq.gov Table Series I. C for single person coverage employee contributions for private sector firms
  2. https://meps.ahrq.gov Table Series I for single person coverage private sector firms
  3. https://meps.ahrq.gov Table Series I.F for single person coverage, private sector firms’ average deductibles, 2002 to 2019
  4. Table I.C.1 from https://meps.ahrq.gov
  5. Data series CEU0500000001 from https://www.bls.gov/ces/data
  6. Data series CMU2020000000000D, CMU2150000000000D from https://www.bls.gov/ncs/#data
  7. This includes production, transportation and materials workers
  8. Data series CMU1020000200000D, CMU1020000400000D, and CMU1020000500000D, respectively, from https://www.bls.gov/ncs/#data
  9. Table I.F.2 from https://meps.ahrq.gov
  10. https://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2018
  11. https://www.bls.gov/opub/mlr/2020/article/comparing-characteristics-and-selected-expenditures-of-dual-and-single-income-households-with-children.htm
  12. I have changed their names to protect their privacy.
  13. https://meps.ahrq.gov
  14. https://www.healthinsurance.org/faqs/my-husbands-employer-offers-good-health-insurance-for-our-family-is-it-true-that-because-of-obamacare-employers-may-start-dropping-spouses-from-their-plans
  15. Using the USDA Cost of Food budgets for May 2021.
  16. https://www.griffinbenefits.com/blog/history-of-employer-sponsored-healthcare
  17. https://www.openmarketsinstitute.org/learn/health-insurance-monopoly
  18. https://www.openmarketsinstitute.org/learn/health-insurance-monopoly
  19. https://www.dol.gov/general/topic/health-plans/cobra
  20. https://www.kff.org/uninsured/issue-brief/key-facts-about-the-uninsured-population