Why do employers offer group health insurance?
A lesson in history
Whenever I ask this question to employers, I receive a variety of answers—everything from caring for employees to recruiting and retention. But very rarely does anyone answer the question correctly.In order to understand why employers offer group health insurance, we have to go back to 1942.
Stabilization Act of 1942
Due to rising inflation, Franklin Roosevelt signed into law the Stabilization Act of 1942, implementing a wage freeze. Employers couldn’t offer employees higher pay, and therefore had to think of creative ways to attract and keep the best employees. So what did most employers do? Start offering group health benefits to employees.
If employers were not previously offering health insurance, they began to offer it. If employers were already offering it prior to 1942, they offered better benefits. Tax code regarding employee-based insurance at the time was ambiguous, but left it possible to provide this as a benefit.
Internal Revenue Code of 195
Prior to 1954, tax regulations of employee benefits were hazy. Many employers offered benefits tax free to employees, but it wasn’t explicitly stated that doing so was legal. However, Section 106 of the Internal Revenue Code of 1954 explicitly excluded employer-provided health insurance from what would be considered to be an employee’s gross income. This allowed employers to write health insurance off as an expense and employees to reap these benefits tax-free. With the IRS’s tax-exempt blessing, more employers offered group health insurance. With such a huge tax incentive, it would be unwise for employers not to offer health insurance to their employees.
So why do employers offer group health insurance? Tax incentives. Sure, there are other additional benefits to offering health insurance like recruiting and retention, but the original reason employers offered group health insurance was for the tax incentive.
Group health insurance today
By incentivizing employer-sponsored health insurance through sizable tax incentives, our healthcare system developed in a way that employers are the customers and employees are merely consumers. What does this mean? Because your employer is footing the bill (paying the insurance company), they are the customer and the health insurance companies are inclined to service them. As the consumer who simply utilizes services, your complaints, needs, and desires, are far less important than those of the paying customer. Under this system, only the employer holds the ultimate bargaining chip of switching insurance carriers if they are displeased with the service they are provided. However, health insurance is provided as a benefit of employment. Salaries are smaller because this benefit is provided. From an economic standpoint, employees are essentially allowing their employers to dictate their healthcare choices using their own money. Because you are paying for your insurance (no matter how indirectly), you should be able to purchase the plan that best fits your needs, which is oftentimes different than the limited options provided through your employer.
While employer-based insurance used to be the sole way of providing a valuable health benefit to employees, the Affordable Care Act has changed this. This current legislation provides an anti-incentive for employers in the form of subsidies. A large portion of Americans are eligible to receive subsidies from the federal government, which on average offset premiums by 76%. However, you cannot qualify for a subsidy if you receive insurance through your employer. For Americans who earn less than around $94,000 as a family or $46,000 as an individual, it is actually cheaper to purchase insurance on the individual market because you will receive a subsidy to offset the cost.
This means that some employers are doing their employees a disservice by providing health insurance because their employees can’t receive subsidies to offset the cost. As noted above, policy has directed the course of the health insurance market and today is no different. With the Affordable Care Act, we’ve seen a shift in individuals, instead of employers, becoming the customers in health insurance. Dr. Ezekiel J. Emanuel, author of Reinventing American Healthcare, predicts that fewer than 20% of employees will be receiving health insurance through their employer by 2025. He believes that instead of competing with the individual market, employers will increase salaries or offer a Defined Contribution in response to the shift in policy.
As history teaches, policy has dictated the course of health insurance. Thanks to recent policy, employees and individuals now hold the power to become the customers in their health insurance decisions. For the first time ever, it is more advantageous to be an individual buying health insurance. And that's what we call healthcare freedom.
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