Tax Subsidies for Employer-sponsored Health Insurance to Exceed $200 Billion This Year

Press Release Date: November 14, 2006

Total Federal and State tax subsidies for employer-sponsored health care coverage for active workers will exceed $200 billion in 2006, an inflation-adjusted increase of more than 150 percent since 1987, according to a new study sponsored by the Department of Health and Human Services (HHS) Agency for Healthcare Research and Quality (AHRQ).

The health insurance premiums that employers contribute to, as well as an increasing share of workers' premium contributions, are exempt from Federal and State income taxes, as well as from taxes for Medicare and Social Security—commonly called "FICA," for the Federal Insurance Contributions Act. The goal of these subsidies is to make job-related health insurance more available to workers.

AHRQ's Thomas M. Selden, Ph.D., and Bradley M. Gray, Ph.D., of the CNA Corporation, a non-profit research institution based in Alexandria, VA, estimate that in 2006, the federal and Social Security payroll tax components of the overall employment health insurance subsidy will total $111.9 billion and $73.3 billion, respectively, while the exemption from State income taxation will total $23.4 billion. The authors further estimate that nearly 80 percent of the overall tax subsidy will go to private establishments and their workers, 17 percent will be for State and local public establishments, and the remaining 3 percent will be for coverage provided to federal employees.

"These estimates are intended to aid policy decisionmaking related to the health care coverage of American workers and their dependents," said AHRQ Director Carolyn M. Clancy, M.D.

The authors also project that in 2006:

• The average tax subsidy for each worker who is covered by employer-sponsored health insurance, regardless of type of employer, will be $2,778.
• The average tax subsidy per worker enrolled in a single-coverage plan will be $1,573, compared with $3,825 for a family-coverage plan.
• The average subsidy per covered federal worker will be $608 more than average, primarily because federal employees are more likely than workers in general to select family coverage.
• The average subsidy per worker in companies with 1,000 or more employees will be $1,886, compared with $770 per worker in firms with fewer than 10 employees.
• The average subsidy per covered worker in establishments where more than half the employees earn more than $23.07 per hour will be $3,283, compared with $2,268 per covered worker in establishments in which the majority of employees earn less than $10.43 per hour.
• The industries with the lowest per-worker subsidies include agriculture, fisheries, and forestry, retail trade, and construction (from $781 to $1,189), while those with the highest average subsidy ($1,751 to $2,289) include financial services, utilities and transportation, real estate, and mining and manufacturing.
• The states with the highest average per-worker subsidies tend to be located in the Northeast, East North Central, South Atlantic, and East South Central divisions of the country, while those with the lowest are found mostly in West South Central, Mountain and Pacific Coast divisions.

The researchers based their projections on data from AHRQ's Medical Expenditure Panel Survey (MEPS), the Nation's most complete survey of how Americans use and pay for health care, including their health insurance coverage. The MEPS Insurance Component surveys employers annually to collect data on the number and types of private health insurance plans offered, benefits associated with these plans, premiums, contributions by employers and employees, eligibility requirements, and employer characteristics.

For more details, see "Tax Subsidies for Employment-Related Health Insurance: Simulation Results for 2006 from the Medical Expenditure Panel Survey," in the November-December 2006 issue of Health Affairs.

For more information, please contact AHRQ Public Affairs: (301) 427-1539 or (301) 427-1855.

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