Is Employer Health Insurance Really Cheaper?
December 8, 2000
Employment-based health insurance covered 155 million Americans in 1998, compared to only 15.5 million who purchase their own policies. People receiving employer-based health insurance receive an enormous tax benefit, worth about $141 billion in 2000, according to the Lewin Group, or 40 percent of the cost of coverage. Much of this subsidy goes to higher-income families.
Many people argue that employer coverage has other natural advantages as well. However, these supposed advantages are often myths, or at best overstated.
Myth: Employer groups make good risk pools.
Fact: Co-workers are actually less diverse than the general population -- for instance, they are able to work and tend to be from a single geographical area.
Myth: Employers are effective agents for their workers.
Fact: Employers are not particularly knowledgeable about either health care financing or medical care services.
Myth: Employer-based coverage is administratively efficient.
Fact: Larger employers absorb much of the administrative cost included in the premiums for individuals and small groups. Their marketing expenses are lower, but Internet marketing and enrollment or non-employment groups could erode this advantage considerably.
Myth: Employers allocate costs fairly among workers
Fact: Since high-risk workers are charged the same premium as young healthy workers, younger workers are more likely to opt out of insurance; thus only 28.6 percent of 25-year-olds have employment-based coverage in their own names, compared to 56.1 percent of 50-year-olds.
Myth: Employer coverage is cheaper than individual coverage.
Fact: Because of the 40 percent subsidy available only to employer-based coverage, the only ones in the individual market are people who are much older, sicker and poorer.
The price advantage for employer coverage would quickly disappear if large numbers of the stable and subsidized workforce entered the individual insurance market.
Source: Greg Scandlen, "Myths about Employer-Sponsored Health Insurance," Brief Analysis No. 344, December 8, 2000, National Center for Policy Analysis.
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