Insurance Markets and the Employer

Insurance Markets and the Employer - Insurance Markets and...

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1 Insurance Markets and the Employer This chapter deals with some of the specifics of insurance markets in the US – mainly the importance and effects of employer-provided health insurance. I. Employer Provision of Health Insurance Most people with insurance obtain it through their employer through either private insurance, Blue Cross and Blue Shield plans, managed care plans or self insured companies In 2008 expenditures in health care were $2.34 trillion. Of this about 45 percent was paid with public funds and 55 percent was privately funded. This percentage has not changed much over the last 20 years: in 1980 public funds accounted for about 40 percent of expenditures. Note the large change in the out of pocket proportion. Almost 40% of total expenditures in 1970, declined to 17% in 2000. The percentage for 2009 is 14.3%. So other than those on public programs, the majority of health care is funded through insurance, and the out of pocket proportion has actually declined over the past 10 years More detail is below in the table from the Centers for Medicare & Medicaid Services. http://www.cms.hhs.gov/NationalHealthExpendData/downloads/tables.pdf
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3 The existence of private insurance came largely out of the Great Depression. Prior to this there was no such market, or people were self insured. Depression hit hospitals and physicians very hard. So in an effort to get back patients Hospitals provided the initial capital to start the Blue Cross plans and controlled the organization. Physicians did the same to start the Blue Shield plans. These were non-profit insures controlled by their prospective provider and thus served their interest. In the 1970s these organizations were split off from the providers. Most states “Blues” have merged together into one Blue Cross/Blue Shield independent non-profit organizations. These plans were originally given special tax exemptions, which made them more attractive to employers, since they were able to offer cheaper coverage, but these advantages have withered as the tax laws and insurance laws have changed. Most coverage is financed by employers. During WWII there were wage and price controls which fixed earnings, but the federal govt. exempted health insurance benefits (and others) from these freezes. Employer-paid insurance premiums are excluded from the taxable income of workers (this cost about 50 billion in tax revenues in 2001). To see how this encourages compensation in the form of benefits consider the following example An individual earns $1,000 per week and would like to by health insurance. Suppose he is in the 28% tax bracket so his take home pay is $720 per week. If his insurance cost $50 per week then his take home pay would be $670 per week. Now suppose that his employer provided his insurance for him at a cost of $50 and pays him $950 in cash so that his compensation is the same. His take home pay is now 72% of 950 which is $684. So he is $14 better off if his employer provides the insurance. Employers also benefit from this since they do not have to
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This note was uploaded on 02/08/2012 for the course ECON 320 taught by Professor Chan during the Spring '11 term at SUNY Albany.

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Insurance Markets and the Employer - Insurance Markets and...

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