Is it fair to tier employee healthcare premiums based on their salary?

Charlie, this isn't a common practice but one that's been catching on in recent years. The idea is to keep the costs of the premiums down for lower paid workers. I for one, don't have a problem with this approach at all. Would you expect the CEO of a company to pay the same for health care as an employee who earns $40K a year?

Last year, 17 percent of employees in large companies nationally paid premiums tied to their salaries, according to the Kaiser Family Foundation. That's up from 14 percent in 2008. People with higher salaries tend to have the luxury of looking after themselves better through activity and healthier food choices.

I support the idea and agree with the premise, it's no different than paying individuals different salaries based on the type of work they do or having to pay more taxes because you make a larger salary. The other issue is the rising costs of health care, it's getting to the point where it won't be affordable for many and you will find more companies wiling to make less of a contribution.

Mark,

You make an excellent point and I agree whole heartedly. This is one of the reasons why I didn't get excited about the notion of universal health care, it doesn't address the root problem as you indicated. North Americans are trapped in a vicious circle that is being mostly controlled by the food and pharmaceutical industry. If you are diabetic, your doctor can only prescribe pills to keep the diabetes at bay, but doesn't provide you with a solution to solve the problem. Doctors are nothing more than legalized drug pushers. Tell me what chronic diseases the medical industry has solved, they only keep the diseases at bay.

There is also a morale issue that is going to rear it's ugly head At some point employers are going to ask themselves, why should I keep paying for your healthcare if you aren't making an attempt to live a healthier lifestyle.

Very little in the health care discipline is actually “fair” and the argument seems to sway back and forth between health care quality and health care costs. I guess this question pertains to cost only so the Utopian answer is that all individuals should pay for their own health insurance and no employers should be involved in it! Now before you go “Ron Paul” on me – hear me out.

If I, as an individual, have to pay for my own insurance the insurance companies will have to compete for my business by lowering costs or increasing quality. A couple of other qualifiers:
1. I, the patient, have to approve the invoice for the insurance company to pay it; and
2. Medical practitioners must be paid by the insurance companies “Net 20 days”.

Today, I have no part in the billing process and the payment of insurance premiums is out of my paycheck so I don’t even notice it. By making me part of the billing process, I might question the $100 vitamin C pill or fight to get my Dr. paid for work he or she did that the insurance company declined! If the costs of my policy go up I might shop it with another provider. If I’m healthy I might just buy catastrophic health insurance which should be very cheap. This means that I will pay the Dr. bills at the same rate as the insurance companies (my local hospital told me they charge people who do NOT have insurance more money) and will be required to pay them just as fast. In fact, my Dr. gets paid at each visit so there are no cash flow problems from me.

The final answer is risk-based until you hit a cap in which the insurers pool funds to cover those with chronic health conditions. The reason I say this is that as you get older your income goes down (too old to get hired) so your percentage of health costs to income should be at about the same percentage. I also noticed that, as you get older, some of your parts begin to wear out which generates medical bills.

The Affordable Care Act introduces new challenges to the decisions about setting premiums and contributions. Traditionally, executives and other higher compensated employees in many industries have most typically benefitted from this layering through executive carve out or other similar arrangements. More recently, however, rising premiums and requirements to maintain minimum participations have motivated some employers with a high number of low paid workers to subsidize premiums more heavily for lower paid workers as a means of promoting their participation. With the Affordable Care Act extending 105(h) style nondiscrimination rules to group health plans and set to begin mandating contributions and other safeguards, many employers are reevaluating the option of layered premiums and other contribution designs versus the option of terminating coverage. Most employers that are not already subsidizing more favorably the premiums for lower paid employees generally are reluctant to implement a new practice at this times based on concerns about the potential long term implications of undertaking this when and if the Affordable Care Act is fully implemented in 2014.

Charlie: From an internal equity perspective, I don't agree with requiring employees with higher (base) salaries to pay a higher share of the premium expense for enrolling in their employer's health insurance coverage. However an alternative approach that I find more equitable is to require these same higher paid employees to have a higher annual deductibleor co-payment limit.

I am curious what you see as the difference or benefit of one approach over another. Whether you do premium or benefit differences, the issue is the same - requiring different employees to pay more or less based on their income. When I work with clients considering these issues, the choice is a practical not equitable one. You increase premium subsidies for low paids when the cost of coverage goes so high that you can't maintain sufficient participation to keep the coverage. In contrast, the current trend is to increase deductibles generally because that reduces overall premiums. When this is the case, employers concerned that lower paids will be financially distressed by the higher deductibles may implement a HRA deductible reimbursement plan which under IRS rules may tend to limit contributions for high paids. Other challenges are requirements in insurance policies which often cannot be varied, particularly for smaller groups.

Seems like the cost of health insurance premiums should represent a universal spread of risk among a population. Then, it seems fair that employees might contribute some proportion of the cost, on a flat percentage basis, in a shared employer/employee funded program.

That employees making more money should pay a greater percentage requires a logic that could suggest that the cost of groceries ought to be pegged to income, or that the price of a Ford Fusion should be higher for higher-income individuals. Sure, the lower-paid people would have to commit a greater percentage of their earnings to health insurance costs, in the same way that they might have to commit a greater portion to food and housing, with less left over for discretionary spending.

Take the argument out of health insurance for a moment. Should higher-income individuals pay more for automobile insurance, based on income? Or, should those premiums be based on experience and out-of-norm risk factors in addition to a simple risk spread among a population? If yes, then the health insurance cost question should be answered on the basis of an equivalent dollar dollar amount for employees/families, irrespective of income, with perhaps a penalty premium (again irrespective of income) based on factors of weight, drug/alcohol abuse, smoking, and other manageable conditions.

Art,

Should individuals with a higher income pay the same in taxes? Let's remember that the companies still fund the majority share of the cost and funding for health care. I do agree that the cost should be based on risk factors. If you smoke, drink or have obesity issues and you are not attempting to resolve them, then perhaps you should pay more for insurance. Now, that being said, there may be exceptions where individuals have a genetic predisposition.
The truth of the matter is that we are starting to lean that way, just look at airplane carriers who will charge some passengers for two seats, instead of one.

Charlie: From an internal equity perspective, I don't agree with requiring employees with higher (base) salaries to pay a higher share of the premium expense for enrolling in their employer's health insurance coverage. However an alternative approach that I find more equitable is to require these same higher paid employees to have a higher annual deductibleor co-payment limit.

this is great feedback and perspective. i have a stronger appreciation for the approach, now. although i'm not sure i'm a fan yet. i do like the idea of higher deductibles and/or coinsurance for higher income brackets (as opposed to higher premiums). but it's kind of funny money - it all comes out in the wash. thanks for the great dialog!