$2,500 Promise: How Big Is It?

Summary: It could be described as 76% of what families pay for health insurance. Or 21%. Which number best fits depends on how you view “paying” for health insurance.

Is $2,500 a lot or a little? One way to think about the magnitude of $2,500 is to compare $2,500 to what health insurance costs.

The most common way for Americans under age 65 to get health insurance is through an employer, either their own or as a dependent of someone who gets coverage through an employer. (We’ll leave the less common route, buying it directly from an insurer, for another post.)

Immediately we’re thrown into a question where economists think about this one way and pretty much everyone else thinks about it another way. The non-economist (dare I say intuitive?) approach is to look at the pay stub of someone who has health insurance through an employer and see how much gets taken out of the pay check as a contribution to health insurance costs.

Here’s what the pay stub approach shows:

- On average, those who had family coverage contributed $3,281 towards the cost of their health coverage in 2007.

- A few people don’t make any contribution toward the cost of their health insurance. In 2007, 20% of those with single coverage paid nothing, and 6% of those with family coverage paid nothing.

- For most people, the employee contribution is less than half of the cost of coverage. Among those with single coverage, 2% paid more than half, and among those with family coverage, 15% paid more than half.

So here’s one way to think about $2,500: For the average person who has family coverage through an employer, it is 76.2% of what he or she contributes towards the cost of health insurance. I’d call that substantial.

Economists come at the question, “How much?” from a different direction. The cost is the cost. How much of that comes from a payroll deduction and how much of that comes from substituting health benefits for cash compensation isn’t important to the employer. The number to look at isn’t the amount that’s deducted from a paycheck but how the employer pays for the health plan.

The average total cost for family coverage was $12,106 in 2007. Employees paid $3,281 and the employer $8,824. Savings of $2,500 represents 20.7% of the total cost of the average premium. (Single coverage cost an average of $4,479 in 2007.)

Sources:

The most commonly cited source of data about employer health insurance is the Kaiser Family Foundation/Hospital Research and Educational Trust Survey of Employer-Sponsored Health Benefits. Data is from the 2007 survey. (Data from the 2008 survey is due out later in September.)
For total premiums and work contribution, Exhibit B, "Average Annual Firm and Worker Premium Contributions and Total Premium for Covered Workers for Single and Family Coverage, by Plan Type, 2007." (page 2 of the report.)
For percentage paying no premium, Exhibit 6.5, "Average Percentage of Premium Paid by Covered Workers for Single and Family Coverage, 1999-2007." (page 73)

The most detailed treatment of "who pays? the employee or the employer?" is in Mark Pauly's book, Health Benefits at Work: An Economic and Political Analysis of Employment-Based Health Insurance.