In 2023, the average employer-sponsored health-insurance premium for family coverage was $23,968. Could workers get a better deal buying their own plans on the individual market?
The current set-up is far from ideal. Employer-purchased health-insurance plans provide one-size-fits-all coverage and fail to account fully for employees’ unique needs. Workers resist plan features that control costs, believing that savings benefit their employer, not themselves. Human-resources departments regularly shift staff onto new plans with new premiums, networks, and cost-sharing structures, impeding workers’ ability to become familiar with their coverage. People who lose their jobs often lose their insurance, too. Many small businesses and part-time workers lack coverage altogether.
Despite these problems, employers purchase 89 percent of private insurance in the United States, largely because firms can buy health insurance for their workers with pre-tax dollars. The Trump administration tried to allow more people to purchase plans from the individual market by establishing the Individual Coverage Health Reimbursement Arrangement, which lets firms give workers pre-tax funds to purchase their own insurance. While the number of employers offering ICHRA benefits more than tripled from 2020 to 2022, still only 8 percent of health-care-offering companies provide these pre-tax funds.
Health insurance costs are mostly driven by hospital expenses. Yet, the same services often cost much more at some hospitals than others. For instance, a study by the RAND Corporation found that, after adjusting for differences in the procedures delivered, the average cost of inpatient treatment at NYU Langone was $44,213, compared with only $23,577 at Mount Sinai. In both cases, however, the average price tag exceeds the $18,900 cap on permitted out-of-pocket costs for family coverage, leaving insured patients little incentive to account for price in their choice of providers.Hospitals therefore compete by investing in the quality, prestige, and attractiveness of their facilities—a phenomenon known as the “medical arms race.” NYU Langone’s high prices reflect a recent $6 billion upgrade to its facility on the East River, featuring roof terraces with landscaped gardens, waterfront views, and superstorm flood protection.
Insurers can reduce medical costs by leaving the most expensive facilities out of their networks—and thus offer significantly lower premiums. For example, while UnitedHealthcare covers six hospitals within two miles of New York City’s Grand Central Station (NYU Langone, New York Presbyterian, Bellevue, Hospital for Special Surgery, Lenox Hill, and the Manhattan Eye, Ear, and Throat Hospital), Oscar Health covers only two (Mount Sinai and Bellevue). As a result, annual premiums for Oscar’s “Gold” family plan on the individual market are $13,114 less than those for UnitedHealthcare, despite covering the same share of medical expenses.
The problem: broad networks are intrinsic to employer-sponsored insurance. While people care that their insurance covers the few providers whom they are likely to use, firms typically employ many workers spread across different neighborhoods. Employer-sponsored group-health plans therefore have little ability to negotiate better rates by threatening to leave costly hospital systems out of their networks. This forces companies to buy expensive, broad-network plans: UnitedHealthcare covers 49 percent of enrollees in New York’s small-group market, compared with the fewer than 1 percent covered by Oscar Health.
Workers could save thousands of dollars per year if they were permitted to opt for narrow-network plans. Indeed, a 2020 study found that the needs-adjusted health-care costs of Americans on the individual market were 27 percent lower than those covered by large employers—but the medical needs of those on the individual market were 20 percent greater.
Individually purchased insurance may therefore be more cost-effective than employer-sponsored plans, but for one major roadblock: Obamacare’s insurance-pricing rules. Personal control over one’s health-care coverage won’t translate to cost savings until policymakers rework these rules, which are pricing most potential enrollees out of the individual market.
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