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Effects of Changes to the Health Insurance System on Labor Markets 1 (July 2009)

handle is hein.congrec/cbo9362 and id is 1 raw text is: A series ofissue summaries from the Congressional Budget Office JULY 13, 2009 Effects of Changes to the Health Insurance System on Labor Markets In the United States, health insurance coverage is linked to employment in ways that can affect both wages and the demand for certain types of workers. That close linkage can also affect people's decisions to enter the labor force, to work fewer or more hours, to retire, and even to work in one particular job or another. Changes to the health insurance system could affect labor markets by changing the cost of insurance offered through the workplace and by providing new options for obtain- ing coverage outside the workplace. For example: Requiring employers to offer health insurance-or pay a fee if they do not-is likely to reduce employment, although the effect would probably be small. Providing new subsidies for health insurance that decline in value as a person's income rises could dis- courage some people from working more hours. Increasing the availability of health insurance that is not related to employment could lead more people to retire before age 65 or choose not to work at younger ages. But it might also encourage other workers to take jobs that better match their skills, because they would not have to stay in less desirable jobs solely to maintain their health insurance. The overall impact on labor markets, however, is difficult to predict. Although economic theory and experience provide some guidance as to the effect of specific provi- sions, large-scale changes to the health insurance system could have more extensive repercussions than have previously been observed and also may involve numerous factors that would interact-affecting labor markets in significant but potentially offsetting ways. The Current Link Between Employment and Health Insurance In 2009, at least 150 million people under the age of 65-or about three out of every five nonelderly Ameri- cans-are expected to have health insurance that is pro- vided through an employer or other job-related arrange- ment, such as a plan offered through a labor union. That figure includes active workers, spouses and dependents covered by family policies, and retirees under the age of 65. The cost of that insurance is estimated to be, on average, $5,000 for a single plan and $13,000 for a family plan. For people whose income is at 300 percent of the federal poverty level (about $32,500 for a single person without children and $66,000 for a couple with two children), that cost represents between 15 percent and 20 percent of total income. One reason employment-based plans are popular is that they are subsidized through the tax code-meaning that nearly all payments for employment-based insurance are excluded from taxable compensation and thus are not subject to income and payroll taxes. Another factor is the economies of scale that larger group purchasers have; such economies reduce the administrative costs embedded in policy premiums. Partly as a result, large employers are more likely than small ones to offer insurance to their workers. 1 Another commonly cited reason for the popularity of employment-based insurance is that employers offering coverage usually pay a large share of the premiums. According to a survey of firms conducted in 2008, employers contributed 73 percent of the cost of a family 1. As a result of those economies of scale, the average share of the policy premiums that covers administrative costs varies consider- ably-from about 7 percent for employment-based plans with 1,000 or more enrollees to nearly 30 percent for policies pur- chased by very small firms (those with fewer than 25 employees) and by individuals.

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