Employed individuals may lack coverage for a variety of reasons.  Employers sometimes only offer health benefits to a select group of employees, such as those who work more than a defined number of hours.  A pre-existing condition may exclude the employee from the health benefit plan.   The benefit plan may require a cost-sharing employee that the employee is either unable or unwilling to pay.[1]  Often times the employees of businesses, large and small alike, who are not offered health insurance are a higher proportion of low-wage workers, making it more difficult to afford to purchase non-group insurance individually.[2]

When an individual does not receive health insurance from an employer, already at a disadvantage because of the absence of an employer subsidy, individual health insurance policies are substantially more expensive due to the higher risk of the individual and the higher marketing and administrative costs of non-group plans.  Less than seven percent of the U.S. population purchase individual, non-group insurance.  The unaffordability of individual health insurance can lead to a situation of “job lock” for some, who are forced to remain at a job because they need to maintain their health coverage.[3]

The tax system that supports employer-provided health insurance, by allowing for the purchase of health care benefits from pre-tax dollars, does not extend to the self-employed, or to those who purchase individual health insurance plans.  Additionally, unincorporated businesses cannot deduct the full cost of employee health benefits.[4]  Flexible Spending Accounts, in which employees may shelter pre-tax earnings to cover out-of-pocket health spending, are only available when provided by an employer.[5]

A conventional theory of insurance called “actuarial fairness” suggests that higher-risk individuals should pay more for their risk: people with bad driving records pay more for auto insurance, and health insurance should function in the same way.  Therefore, individuals who either want or need a higher level of care should pay for it and not require younger, healthier individuals to subsidize those costs.[6]  Otherwise, the system is unfair to those low-risk individuals who will pay more than their care actually costs.  This is the strongest argument against the use of community rating to price insurance premiums, the practice of spreading risk broadly throughout an entire community.  Despite the fact that community rating can help reduce rates overall, it is at the increased cost for the healthier individuals in the community.[7]

Personal perspective may decide if the economics of actuarial fairness is indeed fair in a social insurance scheme, especially since not all risk factors are within an individual’s control.  However, actuarial fairness does not apply within a given workplace.  Cost shifting still occurs within the employee group, within which the system remains unfair for the younger, healthier workers.  Younger workers tend to make less in wages as compared to older workers, so the result is low-wage workers subsidizing the medical expenses of the older, often higher-waged employees.[8]

During the health care debates of the early 1990s, small business owners fiercely opposed the idea of an employer-mandate.  Some larger companies argued that small employers were socially irresponsible when they decide not to provide health insurance to their staff, and that the large firms ultimately become responsible for those costs due to cost shifting.  Of course, that is ignoring the overall unfairness of a system that allows those with purchasing power like large employers to demand price reductions, which ultimately are passed onto those less fortunate.

In terms of fairness and equality, community rating is probably the most consistent means to price health insurance.  Since most individuals will move from low-risk to higher-risk over time, actuarial fairness would eventually be achieved, but only within a closed set of people; this is unlikely in an employee group because of the assumption that there will be turnover.  An entire community is usually larger than any employee group and therefore can help keep costs down overall:

…if one took as a benchmark the even broader risk pooling under genuine social insurance systems, such as Medicare or the European health systems, then the extent of risk pooling achieved by the employer-based system must be judged rather limited and spotty. That is particularly so for small firms with experience-rated group policies.[9]

Case Study: Community Rating and Rochester, NY

In 1992, The New York Times published a cover story on the success of the city of Rochester, in Monroe County, New York, at controlling health care cost.  The majority of employers in the city are committed to the established health insurance pricing system based on community rating.  The community buys health insurance from Rochester Area Blue Cross rather than insuring themselves in separate arrangements, as is the norm in the rest of the nation. Competitive purchasing can reduce a large company’s costs, at least for a time, but it often increases the burden for small companies, which have few employees over which to spread the risks.[10]

The smaller businesses can offer their employees the same affordable insurance coverage as the larger employers.  All the participants pay the same for their premiums, including individual families who can buy into the plan.  In this system, no one is denied coverage based on age, sex, or pre-existing conditions.  Health care costs in Rochester were reported to be at least 25 percent less than national levels.  Compared to the national rate of 14 percent of individuals lacking insurance, Rochester’s uninsured was at six percent of the population, and a follow-up study done in 2001 found Monroe County to still be at a low of eight percent compared to 16 percent nationally.[11]

Eastman Kodak and Xerox are two of the city’s largest employers, and their voluntarily participation in the community rated plan of Rochester is essential to the plan’s success.  While the large companies extend a major service to the entire community through their participation in the city’s risk-pool, the large companies benefit from the overall reduction in health care costs as well.  In fact, the 1991 study showed that Kodak’s health costs averaged $2,100 an employee in Rochester, which was 25 percent lower than at the company’s operations in other cities.[12]

[1] Institute of Medicine, 8-9, 93.

[2] Pauly, and Seifert et al., 17.

[3] Reinhardt.

[4] Gottschalk, 60.

[5] Pauly and Reinhardt.

[6] Institute of Medicine, 179-181.

[7] Seifert et al., 48.

[8] Institute of Medicine, 181 footnote, 183.

[9] Reinhardt.

[10] Milt Freudenheim, “Rochester Serves as Model in Controlling Health Cost,” New York Times, August 25, 1992, A1, also in Institute of Medicine, 127.

[11] Freudenheim, 1992, A1, and Nancy Wong, “Rochester, NY Health Care System Still a Model for Success, According to Latest Harris Interactive Study,” Harris Interactive, (March 27, 2001),

[12] Freudenheim, 1992, A1.