In a recent debate, Joe Biden said that 160 million people like their private insurance. PolitiFact rated this statement as “half true.” This is the number of people who are insured through their employers, and most of these people generally rate this insurance as satisfactory. They shouldn’t. That benefit is much more shaky than most of them think.

Even more consequential in this ongoing debate, in my view, is that the current U.S. system of healthcare “insurance” obfuscates much of the end-consumer costs and intentionally hides these costs from most people who get their insurance through their employers. For starters, I suspect few people could tell you how much their employer spends annually for their family’s healthcare coverage. Second, most don’t understand that, budget-wise, this money comes out of same “financial pot” as does their paycheck. Finally, most people do not know that they and their employers get a huge hidden tax break for contracting their healthcare coverage, a benefit that self-employed people do not get.

I have been part of the annual healthcare coverage review meeting with Human Resources personnel in several types of organizations over many years. HR folks dread this meeting because it invariably features higher cost estimates and difficult coverage decisions. How much of the inevitable cost increase will we have to pass on to employees next year? Will we need to change providers? How will deductibles, out-of-pocket limits, and coverage change? Most employees are blissfully unaware of this drama unless their employer is forced to make major visible changes.

Missing the point in the Democratic debates

The too-large debates among Democratic contenders for the 2020 nomination have been painful to watch. They spend far too much time talking about healthcare system changes that are just not going to happen, and missing the opportunity to talk more in unison about the financial time bombs lurking under the surface in the current system.

I have detailed in previous posts why the Elizabeth Warren Medicare-for-All plan is not my first choice. I do have to give her credit, though, with being the only one, in my reading, willing to comprehensively tackle the economic realities of the issue in committed detail. [see Note 1 below] Warren’s “sin” has been to make these costs and required new revenue sources visible. Her critics are relying on, as this post will detail, the continued blissful ignorance of America’s employer-sponsored insured.

Call them “Hospital and Medical Service Plans”

I have written in the past about why you should not call these companies in the healthcare ecosphere “insurance companies.” The SEC calls them “Hospital and Medical Service Plans.” For many employers, these companies primarily administer a self-insured pot of money that the employer and their employees kick into. These service plans also create effective cartels of preferred providers or very restrictive health maintenance organizations in order to control the outflow of cash. Finally, as I learned from one prospective provider, the paperwork hassles people encounter from their plan provider are often an intentional “slow pay” process intended to manage the cash outflow.

This entire process is mostly hidden from the employees themselves unless a new service plan is brought in. You may only see it when the changes invalidate your current hospital or doctor preferences, or require new pre-authorizations. That pooled risk means that you are paying to insure not just your family, but also the family of the guy sitting next to you at work. If just a couple people in your workplace are diagnosed with cancer and you work for a small business, rates can climb precipitously.

The size of the employer’s contribution to this form of healthcare coverage is also invisible to most employees. According to a 2018 Kaiser Family Foundation study, the employer-covered portion of the healthcare benefit you received averaged about $14,000 for family coverage. The employee himself or herself then kicks in an additional $5000 to $7000 more annually for family coverage before co-payments, deductibles and out-of-pocket expenses.

Let’s put this another way. If you are getting family healthcare coverage from your employer, this is $14,000 per year that appears nowhere in your paycheck or annual W2 form. But it comes directly out of your employer’s “compensation pot” nonetheless. It is cash income that you are not getting. Another $5000 or more just comes in and goes right back out for your more visible portion of the cost, and you pay taxes on that income. Both of these amounts go up annually at an unrelenting pace, often at twice the rate of any net pay increases you have been receiving. [2]

The big employer tax break

And to obscure this impact even more, employers get to deduct the amount that they contribute as if it were compensation, but you are not taxed on that very real but indirect income. This is a “special gift” in the U.S. tax code to your employer called a “tax expenditure.” Indeed, it is the largest tax expenditure in the U.S. tax code by far.

Source: Tax Policy Center

Importantly, this tax benefit is not available to you if you are self-employed trying to purchase your own healthcare coverage of if your employer does not provide coverage. Under the Affordable Care Act, some uninsured people finally got some relief, though not as much as employers get. Single people earning less than less than $49,960 in 2020, or a family of four earning less than $103,000, now get some financial assistance in purchasing coverage on an exchange, but on a sliding scale. Employers, on the other hand, get the tax break no matter how much they pay their employees.

These are huge dollars in the healthcare economy that most people do not see if they are not responsible for paying for their own coverage. Intentionally. Tax expenditures are taxes not collected, but they have exactly the same economic impact as direct taxes, forcing other taxpayers to make up the difference. And most people haven’t figured that out.

This obfuscation is exactly the reason Congress prefers tax expenditures over more visible forms of taxation. And as you can see from the list above, most of these tax expenditures favor businesses and rich Americans. I have written in the past about the hundreds more of these “special interest” tax expenditures that you very likely don’t get.

The hidden employer contribution

Besides that $173 billion annual indirect “tax expenditure” benefit, it has been estimated that employers will be spending $9 trillion dollars over the next decade for their contribution to healthcare premiums if the system does not change. Very few Democratic candidates have been willing to talk about what happens to those dollars.

The Warren platform promises employers a reduction of 2% on that amount if employers pay into a universal system rather than private insurance. That stance is controversial, to be sure. But to my point, at least the Warren campaign is talking about this huge piece of the healthcare economic pie.

The U.S. healthcare economic system is very dependent on this cashflow stream, and also very dependent on most people not seeing it or directly feeling it. Let me suggest that if more people did feel this cashflow going out if their pockets, they would definitely not be as satisfied with the current U.S. healthcare system as they are now. Ignorance is, in very real terms, bliss.

If you like your employer’s healthcare coverage, you need to be prepared for major changes to that benefit in upcoming years, regardless of who becomes President in 2020. That is the economic reality few people want to face. One by one, employers will be forced to make major changes to cope with unaddressed cost increases and the changes won’t be pleasant for their employees.

Notes:

1. Some past posts on the topic:
   • Three viable options between our current system and Medicare-for-All.
   • My view of the math behind Medicare-for-All.
   • How to parse through the candidates healthcare policy proposals.
2. I have detailed in a series of earlier posts how thirty years of 1%–3% payroll growth for “ordinary folks” is the primary cause behind growing income inequality in the United States.