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Can you explain to a Non-American what forces this system of employer insurance onto the US? Why don't independent insurance companies emerge that offer other m

Can you explain to a Non-American what forces this system of employer insurance onto the US? Why don't independent insurance companies emerge that offer other models of insurance?

watertom 7y ago
Big business likes the level of control. Employees are limited in their job mobility, especially to small companies. It restricts competition, it also suppressed wages. Big business in the U.S. gets what it wants, and if they didn’t want employer provided healthcare it would be gone, but it’s not gone so it means they like it. If there was universal healthcare in the U.S. there would be an explosion of small business. Most small business can’t afford to provide healthcare, and if you have an existing health condition there is no guarantee that the plan from your new employer, if they have a plan, will include your doctor, or that they agree with the old doctor’s treatment plan.
- kmjg88nvf8 7y ago
  How can "big business" prevent alternative insurance companies?
  - kelnos 7y ago
    Lobbying for preferred tax treatment. If insurance costs $500/mo, either your company can pay the premium for you directly, with no taxable event for you; or, they can give you $500 more as a part of your salary, but the government will take $150 of that (or whatever, depending on your tax bracket), and then you have $350 to cover a $500 expense. Individuals can deduct medical/insurance payments on their taxes every year, but: 1) the rules are complicated with some payment minimums that mean a lot of people couldn't take the deduction at all, and 2) you have to come up with the extra $150 every month for 12 months before you get that money back (since the US tax system is pay-as-you-go with per-paycheck withholding), which is a real burden for many Americans. Alternatively, your company can give you $715 per month, the government will take $215 of that in taxes, and then you have $500 left over to pay your $500 insurance bill, but: 1) your company would very much rather pay $500 instead of give you $715, and 2) that $715 is actually not a hard number, but will vary depending on each employee's personal tax situation, which can change throughout the year, and your company likely doesn't care to deal with that (this is less of a big deal, since it could be outsourced to a piece of software written by a payroll company). Why do Americans put up with this? Many of them (most?) just don't understand how this all works, and so don't even know they're getting screwed. Many have no concept of systems in other countries that handle this better, in part because they don't travel and don't have friends or family abroad, but more because of concerted misinformation campaigns around any kind of changes to our health care system that would threaten the incumbents. I guess big business doesn't "prevent" alternative insurance companies; there are plenty of available options for insurance that individuals can purchase on their own. But it generally costs more (because you're not an HR benefits person negotiating on behalf of your 500-, 1000-, 50000-person company), and you end up with the bad tax consequences described above. If you're an enterprising individual who wants to set up an alternative insurance company that charges very low premiums for great plans, you run into the problem of having no negotiating power with health care providers, who are used to charging high prices because the traditional insurers will pay them.
    - sokoloff 7y ago
      You can adjust your withholding amounts by filing form W-4 with payroll, so that in-year cashflow issue is largely a red herring. (It’s solvable now and would become standardized/automated if the overall system changed.) Other (more concerning) items you itemize are the real blockers.
      - kelnos 7y ago
        In practice, most people do not actually understand how the boxes on W-4 translate into withholding amounts. There'd be a lot of trial and error involved if done manually. Regardless, there's a reason why I marked that issue as "not a big deal" -- because it isn't -- the other issues I mention are the meat of it.
        sokoloff 7y ago
        The issue you appear to have marked as not a big deal is calculating the gross-up that would be required to keep employees whole not the per-paycheck withholding cash flow issue, which you labeled a “real burden” for some (unless I’m misreading your post). I agree both are manageable and would be automated if things switched models.
orborde 7y ago
One major factor in the US is that, from the perspective of an employee, employer plans have a massive tax advantage compared to anything the employee could buy outside their employer. If your employer pays your insurance premiums, this doesn't count as taxable income for you. So you effectively have a choice that looks like: - Your employer directly pays $200/mo for your insurance, or - Your employer pays you $200/mo as cash, the government takes $40 (adjust as appropriate for tax bracket) out as income taxes, and you have $160/mo left over to pay for health insurance. I can't really speak to the political forces that keep this subsidy in place, though. https://www.taxpolicycenter.org/briefing-book/how-does-tax-exclusion-employer-sponsored-health-insurance-work https://www.taxpolicycenter.org/briefing-book/how-does-tax-e...
- kmjg88nvf8 7y ago
  So if you insure yourself privately, you can not deduct it from taxes? That would be an issue then, but seems easy to fix. Why isn't that part of the health care discussion?
  - orborde 7y ago
    You can deduct it, but there are a couple of distinct minimums in the tax code for how much you have to spend before it starts reducing your taxable income. ( https://www.insurance.com/health-insurance/health-insurance-basics/are-health-insurance-premiums-tax-deductible.html https://www.insurance.com/health-insurance/health-insurance-... ) Also, for simplicity, I left out payroll taxes, which are invisibly paid by your employer directly to the government ( https://squareup.com/us/en/townsquare/payroll-taxes-defined https://squareup.com/us/en/townsquare/payroll-taxes-defined ). So the choice from earlier is actually more correctly stated as: - Your employer directly pays $220/mo for your insurance, or - Your employer pays you $200/mo as cash and pays $20/mo directly to the government in payroll taxes, totaling $220/mo. Then the government takes $40 (adjust as appropriate for tax bracket) out of your paycheck as income taxes, and you have $160/mo left over to pay for health insurance. The payroll tax issue would apply even if you could fully deduct the $200/mo from your personal taxable income. > seems easy to fix. Why isn't that part of the health care discussion? I am as mystified as you are.
leereeves 7y ago
Another factor that hasn't been mentioned yet is adverse selection. Individual health insurance plans do exist, but few healthy people buy them, so the pool is sicker than average, so the insurance costs more, so even fewer healthy people buy the plans, and so on. Employer group plans cost less in part because the pool is generally healthy.
dredmorbius 7y ago
There's both historical and insurance-business (underwriting) reasons. The history: wage-price controls implemented during WWII as labour was taken up by the military and companies had to find some basis other than pay on which to differentiate. Benefits, including health care, were excluded from wage consideration. Insurance itself is the business of assessing, managing, and sharing (or "pooling") risk. In the case of health care, the typical costs that a given population will face are predictable based on age, gender, and various exposures. Given a sufficiently large number of people, a group or policy cost can be assessed. Along with other groups, this results in pooled risk. I'm not an actuary, but "large pool" risk is fairly low, I suspect it's on the order of 30 or so people. Smaller pools can be formed (or more likely: aggregated to form larger ones), down to a small number of members, as few as a handful or so. The idea being that in any given pool, what's called "adverse selection" (people specifically looking for insurance due to high risks) are less likely -- you're dealing with the average population. In individual markets, all of this becomes much less predictable, and/or the transaction and administrative costs of individual insurance simply add up. Since a large share of the population works, or lives in a household with someone who does, allocating healthcare group insurance through employment has more-or-less stuck in the US. The fact that it provides yet more leverage and control by employers over employees is another factor, of course. Source: A long time ago in a galaxy far, far away, I studied this at uni. Plus more recent experiences / exploration.
- sokoloff 7y ago
  Great comment. I’ll agree and add that the pool of people working full-time itself serves as a beneficial selection process for the insurance pool. It includes (expensive) births but excludes a lot of expensive debilitating conditions so long as that condition precludes someone working full-time.
- tomp 7y ago
  I don't think the size of the pool is that relevant. The pool from the perspective of insurance company is all insured people, so it doesn't matter whether it's a company of 5 or 5 individuals joining, it's still a huge pool. Adverse selection is the big reason. An individual signing up for insurance can be used as a signal that means "individual is sick" or "individual is likely to need insurance soon". If a company policy covers all employees (or all employees above a certain level), the signal is "person works" which is orthogonal to "person will need insurance" (in fact, it's probably slightly anti-correlated, a.k.a. "person is fit enough to work").
webninja 7y ago
Tax laws. When healthcare is paid out from payroll, it is FICA exempt which means you don’t have to pay Social Security or Medicare taxes on it.

Can you explain to a Non-American what forces this system of employer insurance onto the US? Why don't independent insurance companies emerge that offer other models of insurance?

watertom 7y ago

Big business likes the level of control. Employees are limited in their job mobility, especially to small companies. It restricts competition, it also suppressed wages. Big business in the U.S. gets what it wants, and if they didn’t want employer provided healthcare it would be gone, but it’s not gone so it means they like it. If there was universal healthcare in the U.S. there would be an explosion of small business. Most small business can’t afford to provide healthcare, and if you have an existing health condition there is no guarantee that the plan from your new employer, if they have a plan, will include your doctor, or that they agree with the old doctor’s treatment plan.

kmjg88nvf8 7y ago
How can "big business" prevent alternative insurance companies?
- kelnos 7y ago
  Lobbying for preferred tax treatment. If insurance costs $500/mo, either your company can pay the premium for you directly, with no taxable event for you; or, they can give you $500 more as a part of your salary, but the government will take $150 of that (or whatever, depending on your tax bracket), and then you have $350 to cover a $500 expense. Individuals can deduct medical/insurance payments on their taxes every year, but: 1) the rules are complicated with some payment minimums that mean a lot of people couldn't take the deduction at all, and 2) you have to come up with the extra $150 every month for 12 months before you get that money back (since the US tax system is pay-as-you-go with per-paycheck withholding), which is a real burden for many Americans. Alternatively, your company can give you $715 per month, the government will take $215 of that in taxes, and then you have $500 left over to pay your $500 insurance bill, but: 1) your company would very much rather pay $500 instead of give you $715, and 2) that $715 is actually not a hard number, but will vary depending on each employee's personal tax situation, which can change throughout the year, and your company likely doesn't care to deal with that (this is less of a big deal, since it could be outsourced to a piece of software written by a payroll company). Why do Americans put up with this? Many of them (most?) just don't understand how this all works, and so don't even know they're getting screwed. Many have no concept of systems in other countries that handle this better, in part because they don't travel and don't have friends or family abroad, but more because of concerted misinformation campaigns around any kind of changes to our health care system that would threaten the incumbents. I guess big business doesn't "prevent" alternative insurance companies; there are plenty of available options for insurance that individuals can purchase on their own. But it generally costs more (because you're not an HR benefits person negotiating on behalf of your 500-, 1000-, 50000-person company), and you end up with the bad tax consequences described above. If you're an enterprising individual who wants to set up an alternative insurance company that charges very low premiums for great plans, you run into the problem of having no negotiating power with health care providers, who are used to charging high prices because the traditional insurers will pay them.
  - sokoloff 7y ago
    You can adjust your withholding amounts by filing form W-4 with payroll, so that in-year cashflow issue is largely a red herring. (It’s solvable now and would become standardized/automated if the overall system changed.) Other (more concerning) items you itemize are the real blockers.
    - kelnos 7y ago
      In practice, most people do not actually understand how the boxes on W-4 translate into withholding amounts. There'd be a lot of trial and error involved if done manually. Regardless, there's a reason why I marked that issue as "not a big deal" -- because it isn't -- the other issues I mention are the meat of it.
      - sokoloff 7y ago
        The issue you appear to have marked as not a big deal is calculating the gross-up that would be required to keep employees whole not the per-paycheck withholding cash flow issue, which you labeled a “real burden” for some (unless I’m misreading your post). I agree both are manageable and would be automated if things switched models.

orborde 7y ago

One major factor in the US is that, from the perspective of an employee, employer plans have a massive tax advantage compared to anything the employee could buy outside their employer. If your employer pays your insurance premiums, this doesn't count as taxable income for you. So you effectively have a choice that looks like: - Your employer directly pays $200/mo for your insurance, or - Your employer pays you $200/mo as cash, the government takes $40 (adjust as appropriate for tax bracket) out as income taxes, and you have $160/mo left over to pay for health insurance. I can't really speak to the political forces that keep this subsidy in place, though. https://www.taxpolicycenter.org/briefing-book/how-does-tax-exclusion-employer-sponsored-health-insurance-work https://www.taxpolicycenter.org/briefing-book/how-does-tax-e...

kmjg88nvf8 7y ago
So if you insure yourself privately, you can not deduct it from taxes? That would be an issue then, but seems easy to fix. Why isn't that part of the health care discussion?
- orborde 7y ago
  You can deduct it, but there are a couple of distinct minimums in the tax code for how much you have to spend before it starts reducing your taxable income. ( https://www.insurance.com/health-insurance/health-insurance-basics/are-health-insurance-premiums-tax-deductible.html https://www.insurance.com/health-insurance/health-insurance-... ) Also, for simplicity, I left out payroll taxes, which are invisibly paid by your employer directly to the government ( https://squareup.com/us/en/townsquare/payroll-taxes-defined https://squareup.com/us/en/townsquare/payroll-taxes-defined ). So the choice from earlier is actually more correctly stated as: - Your employer directly pays $220/mo for your insurance, or - Your employer pays you $200/mo as cash and pays $20/mo directly to the government in payroll taxes, totaling $220/mo. Then the government takes $40 (adjust as appropriate for tax bracket) out of your paycheck as income taxes, and you have $160/mo left over to pay for health insurance. The payroll tax issue would apply even if you could fully deduct the $200/mo from your personal taxable income. > seems easy to fix. Why isn't that part of the health care discussion? I am as mystified as you are.

leereeves 7y ago

Another factor that hasn't been mentioned yet is adverse selection. Individual health insurance plans do exist, but few healthy people buy them, so the pool is sicker than average, so the insurance costs more, so even fewer healthy people buy the plans, and so on. Employer group plans cost less in part because the pool is generally healthy.

dredmorbius 7y ago

There's both historical and insurance-business (underwriting) reasons. The history: wage-price controls implemented during WWII as labour was taken up by the military and companies had to find some basis other than pay on which to differentiate. Benefits, including health care, were excluded from wage consideration. Insurance itself is the business of assessing, managing, and sharing (or "pooling") risk. In the case of health care, the typical costs that a given population will face are predictable based on age, gender, and various exposures. Given a sufficiently large number of people, a group or policy cost can be assessed. Along with other groups, this results in pooled risk. I'm not an actuary, but "large pool" risk is fairly low, I suspect it's on the order of 30 or so people. Smaller pools can be formed (or more likely: aggregated to form larger ones), down to a small number of members, as few as a handful or so. The idea being that in any given pool, what's called "adverse selection" (people specifically looking for insurance due to high risks) are less likely -- you're dealing with the average population. In individual markets, all of this becomes much less predictable, and/or the transaction and administrative costs of individual insurance simply add up. Since a large share of the population works, or lives in a household with someone who does, allocating healthcare group insurance through employment has more-or-less stuck in the US. The fact that it provides yet more leverage and control by employers over employees is another factor, of course. Source: A long time ago in a galaxy far, far away, I studied this at uni. Plus more recent experiences / exploration.

sokoloff 7y ago
Great comment. I’ll agree and add that the pool of people working full-time itself serves as a beneficial selection process for the insurance pool. It includes (expensive) births but excludes a lot of expensive debilitating conditions so long as that condition precludes someone working full-time.
tomp 7y ago
I don't think the size of the pool is that relevant. The pool from the perspective of insurance company is all insured people, so it doesn't matter whether it's a company of 5 or 5 individuals joining, it's still a huge pool. Adverse selection is the big reason. An individual signing up for insurance can be used as a signal that means "individual is sick" or "individual is likely to need insurance soon". If a company policy covers all employees (or all employees above a certain level), the signal is "person works" which is orthogonal to "person will need insurance" (in fact, it's probably slightly anti-correlated, a.k.a. "person is fit enough to work").

webninja 7y ago

Tax laws. When healthcare is paid out from payroll, it is FICA exempt which means you don’t have to pay Social Security or Medicare taxes on it.