Question

One criticism of employer provided health insurance in the U.S. is that it is tax preferred. Why is this a point of criticism? Who benefits most from this policy? Who doesn’t?

Answer 1

The favorable tax status for health insurance as a reward for workers has facilitated the proliferation of health plans funded by employers. For the purpose of determining payroll taxes and federal and state income taxes, employees ' contributions to employee health insurance have been exempted from taxation since 1954. The exemption is basically a discount for those who earn benefits through the employer to purchase health insurance.

Many companies providing health coverage contribute to its expense; in larger firms, this contribution usually accounts for about 75% of the cost of individual coverage and about 65% of the cost of family coverage. This means that there is little benefit from not participating in a health plan, even for those who consider their health risk to be small. Consequently, retention rates are very high and people generally considered good health risks stay in the employer's risk pool, which effectively reduces the premium and makes health insurance dependent on jobs more cost-effective than alternatives.

Critics of the employer-based system say the tax preference is unfair because the exclusion can not benefit people who lack access to the coverage. The tax option, however, further increases job-based coverage's potential to share risk— the main advantage that occupational health insurance has over individual health insurance. Employment-based coverage spreads risk broader and thus more effectively than individual health insurance and is therefore less influenced by adverse selection.

The problems created by the unique health care needs of individuals, which form the purchasing decision, are well known for the individual health insurance market. In contrast, employer-sponsored health plans are offered as part of a compensation package to employees and their dependents, and the self-assessment of a person's risk is only one of many factors leading to acceptance or rejection of a job offer