Wouldn’t it be better if companies just gave the money they put toward health insurance and put it toward payroll instead? That way employees could easily switch to the health plans they wanted rather than be locked into those offered by their company. This would increase competition and I suppose resolve a lot of the problems that politicians are trying to scare us about. So why is it this way? Does the government require companies to provide health insurance?
No, they don’t require health insurance, but it’s a plus. Companies can get package deals too, meaning that insurance through your employer is frequently much cheaper than going out and shopping for your own.
Also, most people are stupid. The laws of economics don’t always apply, because economics assumes that people will behave logically (which I’ve noticed they usually don’t).
The majority of people in my area would fritter away any pay raise they got in return for no benefits, then still whine about not having health insurance.
The trouble is that insurance companies charge much higher rates to individuals who want insurance than they do to large groups.
The fact is, most people don’t get full value from their insurance. Most people are pretty healthy most of the time, and so the insurance premiums are wasted. For instance, COBRA payments for me and my wife are $300 a month. Well, all through my 20s I had no health insurance, and had about $400 dollars in medical expenses for the whole DECADE.
Sure, it was a risk, but most young people (barring childbirth) aren’t going to use very much. So, the insurance companies are happy to take large groups, since many of them won’t get full value from the insurance.
But, if you are an individual, the insurance companies are going to figure that you anticipate greater than average medical expenses, otherwise you’d just pay out of pocket. Therefore, they are going to charge you more.
Oh, and according to the law, if your employer gives you medical benefits, then that is an expense on his part and is not taxable. It is also not classed as income on your part, and you are not taxed on it. So employer provided medical insurance is essentially tax-free. If you were given a higher salary and had to buy your own, then you’d be taxed on the higher salary.
Actually, that’s not necessarily true since health insurance premiums and co-payments are a deductible expense, assuming you itemize.
In the U.S., company provided health insurance is much more likely to cover pre-existing conditions than privately obtained insurance.
The money deducted from your paycheck comes out before taxes are deducted, which is a slight savings.
Not always. Only if the total is more than 2.5% (?) of your AGI. Your copayments for regular checkups and the occasional sickness won’t come close – you’d really need to be sick to get there.
As for why insurance companies like groups over individuals - less risk for them. The greater number of people covered in a group, the more predictable (statistically) the group will be (sampling theory, in a way). Less risk = lower cost.
In addition, many people wouldn’t qualify for individual health coverage for a multitude of reasons. In a corporate plan, everyone is guaranteed coverage without qualifications.
That is waaaaaaay too general. Very often, you can get individual rates on health insurance that are much better than group rates particularly if you are young and healthy. Group rates must take into account the health of the feeblest in the group.
On Group rates vs individual rates: While there may be cases where the group rate is slightly more expensive than the individual rate (for the same coverage), this is rare.
The group rates are almost always cheaper because (a) the insurance companies don’t need to do as much individual marketing; (b) they don’t need to have medical screenings, since a group of active employees is presumed to be reasonably healthy or they wouldn’t be working; © administrative expenses are lower; and (d) mass pricing is almost always lower, same reason the mom-and-pop stores can’t compete with the huge chains.
On deductibility: Medical expenses are deductible if they exceed 7.5% (not 2.5% as was suggested above) of your taxable income. That’s going to be prohibitively expensive for you, or for your employer.
Example: If you’re earning $40,000 a year, and the cost of health care is $3,000, and let’s say your tax rate is 15%… plus 7.5% social security contribution, for a total tax rate of 22.5%.
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If the company pays the health care cost, it costs them $3,000 and you have $40,000 x .7750 = $31,000 in take-home pay.
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If the employer gives you the $3,000 in cash and tells you to buy your own health care… You’re now taxed on $43,000. For deduction, you can deduct excess over 7.5%, and $33,000 x 7.5% = $3,225, so you can’t deduct any of the medical premiums. So your take-home pay is now $43,000 x .775 = $33,325 and you still have to pay $3,000 in health care premium, so you have $30,325 in take home pay.
Thus, even if you can find identical rates, it will cost you an additional $675 (over 20% cost hike).
The situation could be even worse if you were near a tax rate border – the extra $3,000 could put you in a higher tax bracket on that piece of money.
That doesn’t even raise the issue of the people who can’t get health care on an individual basis (or for whom it’s very expensive.)
The only way such an approach would be useful would be if (a) the tax rules were changed to allow full deductibility of all medical costs and (b) insurance companies were required to insure everyone.
There is an alternative. Most large companies in the U.S. (and Canada, and many in the U.K.) offer “flexible” benefit programs, that give you some sort of “spending account” that allows you to buy your own medical program from a menu of offerings. If you don’t want to buy a medical program, you can often select none, and use the “cash” to buy some other (usually tax-deductible) benefit.
Not much to add to C K Dexter Haven’s post. But I think the history of employee medical benefits is that they came into fashion at or around WWII, when wage controls made it hard to increase salaries, and companies started to offer benefits instead. At the time, medical expenses were not as big a percentage of a person’s income as they are today. They were written into the tax codes, and what with that factor, and the tremendous increase in medical expenses over the years, it looks like they are here for a while (barring some form of nationalized health care).
Another factor in group rates vs. individual rates is that by using employer sponsored health plans, the degree of selection is greatly lessened. Selection, in insurance terms, refers to the tendency of individuals to chose coverage in accordance with their anticipated needs, which can increase the cost of the insurance. As an example, if all people paid in full for their own plans, there might be quite a few healthy young people who decide to go without insurance (or to rely on a catastrophic plan). The pool of people who opt for full insurance would consist of people who are, on average, less healthy, which would drive up the cost per person covered. By having the employer pay the bulk of the premiums, healthy employees are incented to join, allowing the health costs to be more evenly spread.
Two things:
Insurance support
With company offered insurance the company (large ones anyway) will typically offer human resources staff to answer questions and deal with the insurance company during disputes. I have found this a vast improvement to the dial-in 1-800 help desk jockey who isn’t allowed to tell you anything over the phone.
Group pull
For accounts with larger companies the insurer will tend to be more prompt and courteous in dealing with the claims since if they aren’t they risk losing a large account. Going it solo you are for more on your own against one of the big boys.
Slight point that needs to be made here. The COBRA (Consolidated Omnibus Budget Reconciliation Act, in case anyone cares) payments may be $300 for you and your wife. But if the policyholder was having the premiums deducted pretax from their paycheck, and it was contributory (the company pays a certain percentage of the premiums), then that makes sense. Once you leave the company, there’s no reason for the employer to pay towards those preiums anymore. They then become the subscriber’s responsibility. Totally. Plus, the employer can charge up to 2% over the amount the health insurance company charges them as an administrative fee.
Just a few observations:
Getting a college/university administration to agree to a group plan for part-time employees is usually an uphill battle fought by the teachers’ unions (assuming that they have one, and many do not). I teach p/t at two colleges (f/t positions being few and far between). One college offers group coverage to pts through Kaiser. The other does not. It’s something we’ll have to negotiate/fight for.
My colleagues in a nearby county have a union and have been battling their administration on this issue for over a year. They’ve had to call in a professional mediator. Their proposal actually would have cost less than the district’s own, but it still got shot down on the grounds that implementing it would be “an administrative nightmare.” There are many more details but I don’t want to gget too far off the topic.
Note: I am talking about p/t instructors only. The security guards, facilities personnel, secretaries, etc. all have coverage.
The pts who can afford to do so pay for their own coverage but only because they run around, teaching at several different campuses. Others have coverage via spouse or some other job. And still others have no coverage at all.
As I said, just observations.
One clarification to my post:
The pt/s I discuss above are not temporary employees (though the districts might have you believe otherwise).
Or if they are, they’ve been “temporary” for many years.
Follow-up to Viva’s comments (and talking only U.S.): Companies are not required to offer health care plans at all. Most medium or large size companies choose to offer plans, mainly for competitive reasons (if their competitors all have plans, they don’t want to lose good employees or have an uphill struggle to hire new employees.) However, once a company has chosen to provide a plan, Federal law restricts how much flexibility there is in conditions for participation in the plan – that is, to whom the plan is offered. Because company-sponsored plans receive a tax break (that is, company-paid premium is not taxable to the employee), the government imposes restrictions on plans to attain that favored (“qualified”) tax status. A company could not, for instance, offer a tax-favorable plan only to employees earning above a certain salary level.
However, employers can exclude part-time or seasonal employees, regardless of whether those are “temporary” or “permanent.”
Thus, as Viva mentions, the fight by part-time staff to win medical coverage is a political/business issue, not a legal one (and this topic started with the question of legal requirements.)