This article takes a look at three top questions from small businesses about employer-sponsored health insurance. Okay, so they may not be the top three asked questions of all time, but they are the top three strategic questions all small businesses should ask about employer-sponsored health insurance.
Before getting to the questions, what is employer-sponsored health insurance? Employer-sponsored health insurance refers to any health insurance paid for by an employer on behalf of its employees. Employer-sponsored health insurance is commonly referred to as "employee health benefits," "job-based health insurance," or "group health insurance."
The majority of private health insurance in the U.S. is employer-sponsored health insurance. For example in 2011, 56% of the U.S. non-elderly population (149 million people) received coverage under employer-sponsored health insurance.
Q1: Why Employer-Sponsored Health Insurance in the First Place?
Employer-sponsored health insurance goes back to the early 1940's. During WWII workers demanded wage increases that were prohibited by wartime wage and price controls. To grant a concession to labor without violating wage and price controls, Congress exempted employer-sponsored health insurance from wage controls and income taxation—in effect allowing "off-the-books" raises for employees in the form of non-taxable health benefits.
This created an enormous tax advantage for employer-sponsored health benefits over health insurance purchased by employees with after-tax dollars (e.g., like auto insurance). By the mid-1960s employer-sponsored health benefits were almost universal. Today, they are a key part of the compensation offered to employees. And, prior to 2014 the only way for some employees to have access to quality, guaranteed issue health insurance was through work. Much of this is changing with health reform's changes to individual health insurance and the growth of defined contribution solutions. Employers are moving away from employer-sponsored group health insurance and looking for new ways to provide the same (or better) health insurance coverage, at a lower cost.
Q2: Why are Larger Employers Much More Likely to Offer Employer-Sponsored Health Insurance?
Larger businesses (200+ employees) are much more likely to offer employer-sponsored group health insurance than smaller employers. Why? Cost.
Small businesses make up a big share of U.S. employers. Of the approximately 7.4 million employers in the U.S., the majority are micro and small businesses.
6 million have less than 200 employees (82% of all employers)
4.6 million have less than 10 employees (62% of all employers)
39% of all small and medium businesses (with less than 200 employees) don’t offer traditional health insurance
65% of all micro employers (with less than 10 employees) don’t offer health traditional insurance
Of the small employers not offering health insurance, the majority (61%) say cost is the primary reason.
Q3: Why is employer-sponsored health insurance "broken"?
Employer-sponsored group health insurance is broken because it costs too much for most small businesses and employees, employees don’t get a choice, and employees lose their health insurance when they switch jobs. As a result, most employees pay too much for health insurance, have no idea what the plan actually covers, and don’t take the time to learn how health insurance works.
It's not surprising, then, that 85% of Americans don’t understand how co-pays, deductibles, co-insurance, networks, and out-of-pocket maximums work. Arguably, it's this disconnection between the consumer and the product that contributes to the unsustainable cost and nature of employer-sponsored health insurance.
These are our top three strategic questions small businesses should ask about employer-sponsored health insurance. What are your questions about employer-sponsored health insurance? Leave a comment.