Health Insurance Health Reform

How much money is your employer contributing to your health insurance?

The answer is $0.

“But Healthcare Economist,” you may say, “I know that my employer contributes $X to my health insurance so this must be false.  Further, businesses always complain about the high cost of health insurance.”

Although businesses do contribute to your health insurance in a nominal way, these contributions are almost entirely offset through a reduction in your wage.  In other words, if your employer did not have to pay for your health insurance, they could offer you more money in salary.

This is the finding of a recent working paper by Kolstad and Kowalski (2012).

As reported in the latest edition of the NBER Digest,

Full-time workers who gained coverage as a result of the reform earned $6,055 less per year relative to what their wages would have been had they not gained ESHI. This value represents nearly the entire average
cost of their health insurance to their employers. Building on this estimate, the authors estimate the welfare impact of the labor market distortion induced by health reform. They estimate that individuals who gained coverage through their employers valued approximately 76 cents of every dollar that their employers spent on their coverage. As the authors note, “because individuals valued ESHI, mandate-based health reform
in Massachusetts resulted in significantly less distortion to the labor market than it would have otherwise.”

In other words, mandated health insurance may be a good thing for the average person and certainly causes less distortionary labor market effects than a wage tax to pay for national health insurance.  Certain individuals, however, will certainly gain or lose depending on their demand for insurance.  Older workers whose employer now must pay for insurance likely value the insurance more than its cost; younger workers, on the other hand, likely would prefer to have the value of the health insurance in increased salary.  Not only do older workers benefit from lower rates from being in a group plan, but younger workers are in effect subsidizing their health insurance.  Younger workers also benefit from the lower administrative costs from being in a group plan, but these savings may not offset the higher insurance cost due to being in a plan with older workers.

Although small businesses are exempt from the Massachusetts (and ACA insurance mandates), medium sized businesses are the ones who will be most hurt by the mandate.  The cost of health insurance is less (per employee) for the average large firm than the average small or medium sized firm.  Thus, these business will likely have to sacrifice some profits to attract workers who could otherwise work at large firms and receive the same salary and benefit packages at lower cost to the employer.


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