Comments on: Third party payment in health care (part 2) http://keithhennessey.com/2009/05/14/third-party-payment-in-health-care-part-2/ Your guide to American economic policy Tue, 27 Jul 2010 13:47:00 +0000 hourly 1 http://wordpress.org/?v=abc By: Otis B http://keithhennessey.com/2009/05/14/third-party-payment-in-health-care-part-2/comment-page-1/#comment-519 Otis B Tue, 19 May 2009 01:33:26 +0000 http://keithhennessey.com/?p=2335#comment-519 There is another subtle issue with this analysis, I think. Imperfect knowledge on the part of the employer and the inability for 'fully' compensate for the savings of not selecting HC as a benefit will also drive wages down for those choosing not to participate. The employer cannot know whether Sarah will choose to have HC. So they cannot announce a pay level(60,000) that would include it or not(68,360). Instead, they often have to estimate what share of employees will choose one or the other and fix pay accordingly. This would further distort the benefits of choosing to have HC coverage.<div class="comment-remix-meta"><a href="#" class="replyto" onclick="replyto('519','Otis B'); return false;">Reply</a> - <a href="#" class="quote" onclick="quote('519','Otis B','There is another subtle issue with this analysis, I think. Imperfect knowledge on the part of the employer and the inability for \'fully\' compensate for the savings of not selecting HC as a benefit will also drive wages down for those choosing not to participate.\n\nThe employer cannot know whether Sarah will choose to have HC. So they cannot announce a pay level(60,000) that would include it or not(68,360). Instead, they often have to estimate what share of employees will choose one or the other and fix pay accordingly. This would further distort the benefits of choosing to have HC coverage.'); return false;">Quote</a></div> There is another subtle issue with this analysis, I think. Imperfect knowledge on the part of the employer and the inability for ‘fully’ compensate for the savings of not selecting HC as a benefit will also drive wages down for those choosing not to participate.

The employer cannot know whether Sarah will choose to have HC. So they cannot announce a pay level(60,000) that would include it or not(68,360). Instead, they often have to estimate what share of employees will choose one or the other and fix pay accordingly. This would further distort the benefits of choosing to have HC coverage.

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]]> By: ESM http://keithhennessey.com/2009/05/14/third-party-payment-in-health-care-part-2/comment-page-1/#comment-518 ESM Sat, 16 May 2009 02:36:36 +0000 http://keithhennessey.com/?p=2335#comment-518 There are some more tweaks that need to be done. First, to answer your question about the $640, Sarah's W-2 will show total wages of $68,360. She needs to pay 1.45% medicare + 6.20% social security tax on that entire amount. Keith is saying that Kelly's W-2 will show total wages of $60,000. She needs to pay 1.45% + 6.20% in payroll taxes on that amount, which will be 7.65%*($68,360-$60,000) = $640 less than what Sarah pays. Now, here's an extra tweak on WJ's correction. Kelly has to pay $3,000 in health care premiums out of her paycheck, but that $3,000 comes out before payroll taxes (and certainly before income taxes) are applied. So Kelly's W-2 will actually show total wages of $57,000, and her payroll tax burden will be $869 less than Sarah's. So the true bottom line is this: After health care is paid for, Kelly takes home $38,390 after tax (both the 7.65% payroll tax and the 25% income tax). Sarah takes home $34,040 after tax ($68,360*(1-7.65%-25%) - $12,000). This is a difference of $4,350, which is even larger than what Keith came up with. Although my calculations assume an average income tax rate of 25% (which is not realistic), the difference ends up the same for a marginal income tax rate of 25% (which is realistic).<div class="comment-remix-meta"><a href="#" class="replyto" onclick="replyto('518','ESM'); return false;">Reply</a> - <a href="#" class="quote" onclick="quote('518','ESM','There are some more tweaks that need to be done.\n\nFirst, to answer your question about the $640, Sarah\'s W-2 will show total wages of $68,360. She needs to pay 1.45% medicare + 6.20% social security tax on that entire amount. Keith is saying that Kelly\'s W-2 will show total wages of $60,000. She needs to pay 1.45% + 6.20% in payroll taxes on that amount, which will be 7.65%*($68,360-$60,000) = $640 less than what Sarah pays.\n\nNow, here\'s an extra tweak on WJ\'s correction. Kelly has to pay $3,000 in health care premiums out of her paycheck, but that $3,000 comes out before payroll taxes (and certainly before income taxes) are applied. So Kelly\'s W-2 will actually show total wages of $57,000, and her payroll tax burden will be $869 less than Sarah\'s.\n\nSo the true bottom line is this:\n\nAfter health care is paid for, Kelly takes home $38,390 after tax (both the 7.65% payroll tax and the 25% income tax).\n\nSarah takes home $34,040 after tax ($68,360*(1-7.65%-25%) - $12,000).\n\nThis is a difference of $4,350, which is even larger than what Keith came up with. Although my calculations assume an average income tax rate of 25% (which is not realistic), the difference ends up the same for a marginal income tax rate of 25% (which is realistic).'); return false;">Quote</a></div> There are some more tweaks that need to be done.

First, to answer your question about the $640, Sarah’s W-2 will show total wages of $68,360. She needs to pay 1.45% medicare + 6.20% social security tax on that entire amount. Keith is saying that Kelly’s W-2 will show total wages of $60,000. She needs to pay 1.45% + 6.20% in payroll taxes on that amount, which will be 7.65%*($68,360-$60,000) = $640 less than what Sarah pays.

Now, here’s an extra tweak on WJ’s correction. Kelly has to pay $3,000 in health care premiums out of her paycheck, but that $3,000 comes out before payroll taxes (and certainly before income taxes) are applied. So Kelly’s W-2 will actually show total wages of $57,000, and her payroll tax burden will be $869 less than Sarah’s.

So the true bottom line is this:

After health care is paid for, Kelly takes home $38,390 after tax (both the 7.65% payroll tax and the 25% income tax).

Sarah takes home $34,040 after tax ($68,360*(1-7.65%-25%) – $12,000).

This is a difference of $4,350, which is even larger than what Keith came up with. Although my calculations assume an average income tax rate of 25% (which is not realistic), the difference ends up the same for a marginal income tax rate of 25% (which is realistic).

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]]> By: Alex C. http://keithhennessey.com/2009/05/14/third-party-payment-in-health-care-part-2/comment-page-1/#comment-517 Alex C. Fri, 15 May 2009 14:31:23 +0000 http://keithhennessey.com/?p=2335#comment-517 WJ - Good catch in noticing that when Kelly has $60,000 in disposable income she in health insurance limbo, her employer has paid $9,000 of the $12,000 health insurance premium but she Kelly has not paid her mandatory $3,000. We should really be comparing Kelly and Sarah after they have both paid their health insurance premiums: Kelly would have $57,000 and Sarah would have $53,630 ($65,630-$12,000). This means that Kelly is able to get her desired health insurance and has $3,370 extra in disposable income. Also, Keith can you clarify why Kelly pays $640 less in wages? I would assume that it is because Kelly pays out $9,000 in wages to health insurance as an exclusion, but it would be nice to see in the income statement for Kelly vs. Sarah.<div class="comment-remix-meta"><a href="#" class="replyto" onclick="replyto('517','Alex C.'); return false;">Reply</a> - <a href="#" class="quote" onclick="quote('517','Alex C.','WJ - Good catch in noticing that when Kelly has $60,000 in disposable income she in health insurance limbo, her employer has paid $9,000 of the $12,000 health insurance premium but she Kelly has not paid her mandatory $3,000.\n\nWe should really be comparing Kelly and Sarah after they have both paid their health insurance premiums: Kelly would have $57,000 and Sarah would have $53,630 ($65,630-$12,000). This means that Kelly is able to get her desired health insurance and has $3,370 extra in disposable income.\n\nAlso, Keith can you clarify why Kelly pays $640 less in wages? I would assume that it is because Kelly pays out $9,000 in wages to health insurance as an exclusion, but it would be nice to see in the income statement for Kelly vs. Sarah.'); return false;">Quote</a></div> WJ – Good catch in noticing that when Kelly has $60,000 in disposable income she in health insurance limbo, her employer has paid $9,000 of the $12,000 health insurance premium but she Kelly has not paid her mandatory $3,000.

We should really be comparing Kelly and Sarah after they have both paid their health insurance premiums: Kelly would have $57,000 and Sarah would have $53,630 ($65,630-$12,000). This means that Kelly is able to get her desired health insurance and has $3,370 extra in disposable income.

Also, Keith can you clarify why Kelly pays $640 less in wages? I would assume that it is because Kelly pays out $9,000 in wages to health insurance as an exclusion, but it would be nice to see in the income statement for Kelly vs. Sarah.

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]]> By: WJ http://keithhennessey.com/2009/05/14/third-party-payment-in-health-care-part-2/comment-page-1/#comment-516 WJ Thu, 14 May 2009 20:09:51 +0000 http://keithhennessey.com/?p=2335#comment-516 I think there might be a mistake. At the end you state in the "MEMO" that Kelly has Health Insurance and $60,000. I believe that is not entirely accurate, as Kelly would still need to pay the additional $3,000 (tax deductible) for her co-pay of the employer provided health insurance premium to have fully covered health insurance. Therefore, Kelly's bottom line would be $57,000 and fully insured vs Sarah at $65,630 and no health insurance.<div class="comment-remix-meta"><a href="#" class="replyto" onclick="replyto('516','WJ'); return false;">Reply</a> - <a href="#" class="quote" onclick="quote('516','WJ','I think there might be a mistake. At the end you state in the \"MEMO\" that Kelly has Health Insurance and $60,000. I believe that is not entirely accurate, as Kelly would still need to pay the additional $3,000 (tax deductible) for her co-pay of the employer provided health insurance premium to have fully covered health insurance.\n\nTherefore, Kelly\'s bottom line would be $57,000 and fully insured vs Sarah at $65,630 and no health insurance.'); return false;">Quote</a></div> I think there might be a mistake. At the end you state in the “MEMO” that Kelly has Health Insurance and $60,000. I believe that is not entirely accurate, as Kelly would still need to pay the additional $3,000 (tax deductible) for her co-pay of the employer provided health insurance premium to have fully covered health insurance.

Therefore, Kelly’s bottom line would be $57,000 and fully insured vs Sarah at $65,630 and no health insurance.

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]]> By: Grace-Marie Turner http://keithhennessey.com/2009/05/14/third-party-payment-in-health-care-part-2/comment-page-1/#comment-515 Grace-Marie Turner Thu, 14 May 2009 18:42:28 +0000 http://keithhennessey.com/?p=2335#comment-515 Thank you, Keith, for this detailed explanation of the tax exclusion for employment-based health insurance and how it impacts two employees in identical situations except for whether they get health insurance at work. It is hard for employees and employers to understand this flow of funds, making it all too easy to confuse the political debate over this issue. It's time to end the confusion by making the full costs of health insurance visible to employers and employees and making the tax break fairer and portable, as President Bush had proposed.<div class="comment-remix-meta"><a href="#" class="replyto" onclick="replyto('515','Grace-Marie Turner'); return false;">Reply</a> - <a href="#" class="quote" onclick="quote('515','Grace-Marie Turner','Thank you, Keith, for this detailed explanation of the tax exclusion for employment-based health insurance and how it impacts two employees in identical situations except for whether they get health insurance at work. It is hard for employees and employers to understand this flow of funds, making it all too easy to confuse the political debate over this issue. It\'s time to end the confusion by making the full costs of health insurance visible to employers and employees and making the tax break fairer and portable, as President Bush had proposed.'); return false;">Quote</a></div> Thank you, Keith, for this detailed explanation of the tax exclusion for employment-based health insurance and how it impacts two employees in identical situations except for whether they get health insurance at work. It is hard for employees and employers to understand this flow of funds, making it all too easy to confuse the political debate over this issue. It’s time to end the confusion by making the full costs of health insurance visible to employers and employees and making the tax break fairer and portable, as President Bush had proposed.
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]]> By: understanding health insurance « RockStar PeterSon http://keithhennessey.com/2009/05/14/third-party-payment-in-health-care-part-2/comment-page-1/#comment-514 understanding health insurance « RockStar PeterSon Thu, 14 May 2009 18:31:38 +0000 http://keithhennessey.com/?p=2335#comment-514 [...] Third party payment in health care (part 2) [...]<div class="comment-remix-meta"><a href="#" class="replyto" onclick="replyto('514','understanding health insurance « RockStar PeterSon'); return false;">Reply</a> - <a href="#" class="quote" onclick="quote('514','understanding health insurance « RockStar PeterSon','[...] Third party payment in health care (part 2) [...]'); return false;">Quote</a></div> [...] Third party payment in health care (part 2) [...]
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