Do you really want the insurance policy your employer chooses for you?

One of the President’s promises when he was promoting the Affordable Care Act was the now infamous “If you like your health insurance, you will be able to keep your health insurance.” Soon after he made that statement, the Congressional Budget Office (CBO) provided an analysis of the legislation and estimated that 6-7 million Americans would lose employer sponsored insurance (ESI) and instead receive coverage from one of the insurance exchanges.  After the June SCOTUS decision on the Act’s constitutionality, the CBO revised that number and now estimate that it will be more like 20 million.  Other analyses (McKinsey) estimate that the number losing ESI could run as high as 80 million.

I’m not sure whose estimate is closer, but let’s consider the incentives.  Using the table below let’s look at it from the employer’s perspective.  Working with the column on the left, suppose a worker is paid $50,000 in salary and has a generous family insurance plan with the employer paying 75% of the $13,375 annual premium. The total compensation cost of hiring the worker is $41,335 (the employer pays FICA and gets a tax deduction equal to 35% of the before tax expense).  Instead the employer could forego providing insurance and instead choose to pay the penalty ($2,000) for failure to do so.  In that case, the employer could pay the worker an additional $6,200 and still end up with a total compensation cost of $41,335.

With Insurance

Employer

Without Insurance

50,000

Salary Paid

56,200

10,025

Family Premium (75%)

            0

60,025

Salary + Insurance

56,200

   3,570

FICA (7.65% Medicare Salary)

   4,300

63,595

BT Personnel Expense

60,500

22,260

Tax Deduction (35%)

21,165

41,335

AT Personnel Expense

39,335

            0

Penalty

   2,000

41,335

Personnel Expense AT &   Penalty

41,335

Examine the table below to understand how will the employee might respond to this situation.  With insurance the employee receives $50,000 (enjoys a $43,086 before-tax take-home) and a generous insurance policy provided with a generous subsidy from the employer.  Without insurance the worker receives $56,200, pays the FICA tax, a 2.5% penalty for not having insurance, and still has $50,600 to take home before-taxes.  Should the worker seek insurance through an exchange, there is no penalty and the maximum premium of 7.7% of income.  Bottom line, the worker has comparable insurance and $47,573 after paying for health insurance (a 10% increase in take-home pay).

With Insurance

Employee

Without Insurance

50,000

Salary Paid

56,200

   3,344

Family Premium (25%)

            0

46,656

Medicare Salary

56,200

   3,570

FICA (7.65% Medicare Salary)

   4,300

43,086

BT Take Home

51,900

            0

Penalty (2.5%)

   1,300

43,086

BT Take Home less Penalty

50,600

 

Maximum Exchange Premium

   4,327

 

BT Take Home with Insurance

47,573

With the prospects of insurance and an additional 10% take-home pay, workers have an clear incentive to request (no, demand) the additional income and seek their own insurance through the exchange.  Employers would be indifferent.  How many will pursue this option?  Six million, 20 million, 80 million.  What would you do?  The choice seems obvious, 10 percent more money and the ability to choose my own insurance policy – personal, portable, and designed to fit my needs.  I know which one I’m choosing.