Employer-Sponsored Health Insurance Insulates Employees From Full Cost, Promotes Overspending

Ezra Klein in today's Washington Post article "You Have No Idea What Health Costs" writes that "The average health-care coverage for the average family now costs $13,375, according to the the Kaiser Family Foundation's 2009 Employer Benefits Survey."

Actually that's not exactly accurate, since Kaiser actually reported that "In 2009, the average annual premiums for employer-sponsored health insurance are $4,824 for single coverage and $13,375 for family coverage. Premiums for family coverage are 5% higher than last year ($12,680), but there was no statistically significant growth in the single premiums."

According to America's Health Insurance Plans (AHIP), the Average Annual Health Insurance Premiums in 2007 were $2,613 for "individual market single coverage," and $5,799 for individual family coverage," or about half of the employer-sponsored health insurance costs quoted by Kaiser. The huge difference in premiums is likely because the AHIP data includes insurance for those not covered by employer-sponsored health insurance, including those who are self-employed or retired.

This difference in health care insurance premiums between Kaiser and AHIP highlights some of the major problems associated with employer-sponsored health insurance: a) it's a tax deductible expense for the business, b) it's non-taxable compensation for the employee, and c) employees are insulated from the full cost of medical insurance because they pay only 26% of the full cost, all of which serve to result in overspending on more expensive health care coverage, ceteris paribus.

As Jeffrey Flier, Dean of the Harvard Medical School recently wrote:

There is our inefficient and inequitable system of tax-advantaged, employer-based health insurance. While the federal tax code promotes overspending by making the majority unaware of the true cost of their insurance and care, the code is grossly unfair to the self-employed, small businesses, workers who stick with a bad job because they need the coverage, and workers who lose their jobs after getting sick.