Linking Insurance Premiums to Wages

A recent article in the Washington Post describes an interesting scenario, whereby health insurance premiums within a company are linked to workers' wages.

At most companies, employee health insurance premiums vary only by family size and type of plan.  At a small percentage of firms, however, another variable is taken into account: salary. At these companies, workers’ premiums are pegged to how much they earn. Workers who earn less, pay less.

General Electric adopted this salary-based premium model more than 20 years ago. The company divides its 140,000 U.S. employees into those paid by the hour and those on salary, then sets employee premium contributions based on seven salary ranges, with lower-wage employees paying relatively less than higher-wage employees. Hourly employees pay 24.5% of the premium, on average, while salaried employees pay an average of 35%.

In one GE option, a worker making less than $25,000 a year pays $631 annually for individual coverage while someone who earned $150,000 or more would pay $2,151.

Only one in 10 employers with 500 or more employees uses a salary-based premium model, according to human resources consultant Mercer’s  2011 national survey of employer-sponsored health plans. That figure has hardly budged since 2006, when 9 percent of such companies reported using that model. The practice is most common in the financial services industry.

Planning ahead

Now, as employers look toward 2014 — when companies that don’t offer affordable coverage to their workers may begin to face penalties — experts say more companies are considering this strategy.

Under that law, employers with at least 50 employees must offer their workers affordable health coverage or pay penalties. A plan is considered affordable if the employee’s share of the premium for individual coverage doesn’t exceed 9.5 percent of his household income.

If the premium costs more than that, an employee can choose to buy subsidized coverage on his state’s health insurance exchange. But the employer will be penalized — up to $3,000 for each employee who chooses the exchange.

Varying employee premium contributions by salary can keep lower-wage workers’ costs under that 9.5 percent threshold. It’s a good solution for some companies, but it may not be workable for firms that employ predominantly lower-wage employees, such as retailers, restaurants and grocery stores. Ideally, you need enough higher-wage workers to pay a little bit more so they can make a meaningful dent in the contributions of lower-wage workers.

This makes great sense to me.  Especially if employers were able to tie in deductables and out of pocket expenses to the same waged-based formula. What do you all think?




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