Employer sponsored health insurance can paradoxically worsen income inequality
January 29, 2024
Source: Hager et al, JAMA Network Open 1-16-24 LINK This graphic from Axios
Health insurance is an important benefit for employees. Health insurance provides access to preventive care without cost sharing, and provides protection against financial ruin from an expensive, unanticipated illness. The Affordable Care Act, the Employee Retirement and Income Security Act (ERISA), and many state regulations prohibit discrimination - so that the health insurance offered to highly paid executives and low wage workers must generally be the same.
Some elements of health insurance, though, can exacerbate inequalities. Health insurance costs are not subject to federal taxation, which is enormously valuable for those in the top income bracket, but of little value to those with lower incomes who are subject to low or no federal income tax. Lower wage workers often cannot afford the plans with the highest actuarial value, and some cannot afford the out-of-pocket payments, so they cannot use their insurance to get non-preventive care. Some lower wage workers opt out of employer sponsored health insurance altogether.
Researchers in JAMA Network Open show that an especially large threat to those at lower income levels is the increasing cost of health care. Since 1988, health insurance increased from 13% to 26% of total compensation for those at the 20% percentile of income. Those at the 95th percentile of income saw health insurance increase from 3% to 4% of their total income. As a result, salaries for lower wage workers have not kept up with the cost of living. The high cost of health insurance has encouraged automation and offshoring of work otherwise performed by lower wage workers
An unrelated study done by a revenue cycle firm in 2022 showed that the majority of bad debt at hospitals is now attributable to people who have insurance, but cannot afford cost sharing. This analysis notes that hospitals are rarely able to collect post-insurance debts
over $5000 (32%) or $7500 (17%).
Implications for employers:
Health care affordability remains a large challenge for many employees. Thirty four percent of employers stated that employee affordability was a top priority in the WTW 2023 Best Practices in Healthcare Survey.
Employers can increase health care affordability for low wage workers through “salary banding,” (offering lower premiums to workers based on salary or job classification). A quarter (25%) of employers reported offering this in 2023, up from 15% in 2019.
Employers can offer a health plan without high deductibles - since these can pose high financial risk to those with lower incomes. Tax advantaged health savings accounts also offer little tax benefit to lower wage workers.
Many employers offer financial counseling or apps for financial planning; some offer student loan repayment.
Some employers have also offered programs that let employees draw their wages more frequently. This can keep lower wage earners from taking payday loans, but is not likely to address health care affordability.
Here’s a link to an article, “Making Health Care Affordable For Low Wage Workers” I coauthored with my WTW colleague Steve Nyce PhD in Harvard Business Review (2019). Steve and Billie Jean Miller coauthored “The big paycheck squeeze: The impacts of rising healthcare costs” last summer; this article pointed out that “the rising costs of healthcare … have been depleting employees’ take-home pay for decades.”
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