Two-thirds of nonelderly Americans receive their health insurance through employment-based plans. These employer-sponsored plans account for most workers’ out-of-pocket healthcare spending and wages.
However, many panelists emphasized that health benefits compete with other human resource concerns pertinent to their companies’ success. These include a wide range of compensation and recruiting strategies.
Costs
The cost of providing health insurance to employees is a major concern for many employers. The benefits to the employer of having healthy employees are significant, but the costs of offering this benefit may be prohibitive for some firms. Research has shown that poor health increases absenteeism and lower productivity. However, the causes of these effects still need to be better understood. But how much do employers pay for health insurance? In 2022, the typical employer premium contribution for single coverage was 80%, while for family coverage, it was 67%.
Employers may have several options for paying for employee health insurance coverage. They may pay the full premiums or share the cost with their employees through a payroll deduction. Employers should carefully weigh these options when deciding on the appropriate approach to paying for health insurance.
The cost of providing health insurance for employees can vary depending on the firm’s size, industry type, and geographic location. It can also be affected by the health of the workforce and market inflation on healthcare services pricing and utilization.
The cost of health care in the United States has increased dramatically, and most employers are looking to find ways to control their expenses. Some are exploring options such as using a defined contribution strategy, which allows the employer to contribute a fixed amount toward an employee’s health insurance. Others are experimenting with other methods, such as offering high-deductible plans and wellness programs.
Taxes
Some health-related expenses are tax-deductible as ordinary business income, including the cost of group health insurance. However, other types of employer-provided health benefits are not tax-deductible. This includes on-site medical clinics, nurse visits, wellness programs, and smoking cessation classes. Additionally, certain small businesses considered “self-employed” (including sole proprietorships and 2 percent shareholders of an S corporation) are taxed on the value of their health coverage.
In addition to health insurance premiums, the federal and most state tax systems subsidize other types of healthcare costs not covered by insurance by excluding contributions from income and payroll taxes to various health-related spending accounts.
These include employees’ contributions to flexible spending arrangements, employers’ contributions to health reimbursement and savings accounts, and employer and employee reimbursements for certain prescription drug copayments. These other tax subsidies promote overconsumption of health insurance and healthcare services by reducing the effective price of these items.
Limiting the income and payroll tax exclusion would increase the after-tax price of employment-based health insurance, influencing firms’ decisions to offer it and workers’ choices to enroll. CBO and JCT’s models estimated that under the first alternative, limiting the exclusion to the 75th percentile of premiums in 2026 would cause 109 million fewer people to receive an offer of employment-based health insurance than under current law.
The effect under the other two alternatives would be smaller, though fewer people are expected to receive an offer of health insurance in any case.
Employees’ Choice
Regarding health insurance, workers want coverage to protect them from high medical costs. They also desire the freedom to choose their medical plans and quality of care. However, the transaction and time costs of purchasing individual health insurance can be prohibitive. Hence, workers continue to demand group coverage from their employers.
Surveys suggest that most workers consider employment-based health insurance a key component of their compensation package. This is unsurprising, as it has been a major determinant in job decisions for years. However, the relative importance of the benefit varies among different workers and firms. In a recent survey, 73 percent of workers said that the health insurance offered by their employer is very important to them.
Many large firms allow their employees to purchase individual insurance on their own, but many workers choose not to take this option. These workers may prefer the relative stability of traditional group health insurance or value other benefits more than their cost. In addition, some workers do not have access to individual health insurance through their spouses or Medicare.
Although some research has examined how workers’ valuation of firm-provided health insurance affects firms’ behavior, researchers need to be more comprehensive in their ability to measure the impact of specific features of the benefit. For example, it isn’t easy to separate the effects of the health insurance benefit from other elements of a worker’s total compensation package, such as wages and retirement plans.
Company’s Strategy
Increasingly, employers are seeking to customize the health care benefits package. This customization can take the form of various product offerings or more flexible ways workers can choose between them. Some of this customization reflects the need for new, younger workers to value benefit portability or cash-oriented compensation options in addition to traditional health care coverage. In some instances, this customization also results from employers’ need to address the challenges presented by rapidly rising prescription drug costs.
Panelists also noted that their strategic decision-making about health benefits varies greatly depending on the type of plan in place and the nature of the company’s relationship with the sponsoring organization. In some cases, employers collaborate with other purchasers to improve their negotiating leverage and share information more efficiently with their health plan contractors.
The panelists generally shared a concern that the current trend toward employer-sponsored defined contribution strategies may eventually undermine their ability to offer health benefits. Many participants believe such a shift would significantly disrupt employee relationships, squander employers’ years of effort in cost containment, and jeopardize the efficiencies created by pooling their workforce interests within an established benefits package.
