The burden of employer-sponsored insurance (ESI) for health care falls on the employees enrolled in the plans, but many of these workers believe their companies are paying, not them. Employers send premium payments to insurers for ESI but then offload the cost by restraining cash compensation for their workers.
A 2023 working paper by Anqi Chen, Alicia H. Munnell, and Diana Horvath traces the long-term trend in employer-paid health coverage premiums relative to total worker compensation. In 1996, ESI premiums accounted for about 5.5 percent of the total. By 2019, it had reached about 7.5 percent.
When employers pay more for health coverage, they adjust what they offer as cash wages. The effect is slower cash income growth for workers, and also less federal revenue, including for Social Security and Medicare, as employer-paid premiums are excluded from the income and payroll taxes owed by workers (the premiums are also excluded from the payroll taxes owed by firms).
Another consideration is the regressive nature of ESI premium payments. According to the authors of the paper, among workers in the lowest decile who accept an offer of ESI coverage, the share of their compensation devoted to health premiums exceeds 50 percent. In the third lowest decile, it is still above 20 percent. Private insurance premiums are not adjusted based on the incomes of the enrollees.
Unfortunately, current federal policy reinforces the mistaken view that employers pay for ESI. Under the Affordable Care Act (ACA), employees can opt for premium assistance in the law’s exchanges if their employers do not offer an “affordable” ESI option. Affordability is determined by looking only at the worker’s share of the premium.
Federal subsidies for low-income individuals getting coverage through the ACA’s exchanges are far more generous than the implicit tax subsidies for ESI. For instance, for a four-person household with an income at twice the federal poverty level, or $64,300 in 2025, the premium and cost-sharing subsidy for an average plan would be about $18,800, or $13,500 more than the federal tax subsidy for an average ESI plan.
Some analysts want all workers to be allowed to opt out of ESI and into the subsidized policies offered through the ACA exchanges. However, with tens of millions of lower-income families now enrolled in ESI, the cost to the federal budget could be substantial. Moreover, a large migration out of ESI might destabilize this coverage option to the point of collapse.
A better strategy would be to allow lower-wage workers to use modified premium credits to offset the cost of ESI. These credits need not be as generous as those provided for exchange coverage. For instance, when filing income taxes, workers documenting their enrollment in ESI with incomes below a specified threshold could receive a refundable tax credit of $1000 per person, or whatever level would be affordable based on an offsetting subsidy for higher-paid employees (see below). Combined with the subsidy associated with the exclusion of employer-paid premiums from federal taxes, low-wage households in ESI would be better off than they are today but still subsidized at rates that are below what is offered in the ACA exchanges.
The cost of new ESI credits for low-income households could be offset by reducing the ESI tax subsidy for higher-income households. For instance, the total amount of employer-paid premiums that is eligible for exclusion from federal taxation might be capped for workers with annual incomes exceeding a certain threshold. The tightness of this new limit and the generosity of the new credits could be calibrated to ensure their combined effect does not widen the federal government’s future annual budget deficits. In 2025, the average employer contribution toward ESI is $19,300. Setting a cap at $20,000 would capture the highest cost plans and could apply to workers with incomes well above the national average.
Congress also should go beyond redistribution and reform ESI to slow premium growth in future years. While ESI has many positive characteristics, individual employers struggle to control costs. Even large employers lack the scale to change how medical services are delivered to patients, and many companies do not want to upset their workers with more restrictive health coverage than is the norm among their competitors.
The solution to this collective action problem is to establish rules for all ESI plans that push the entire market toward more cost discipline. For instance, ESI coverage should incentivize strong price competition by sharing savings with plan enrollees who select lower-priced suppliers of services. Employers also should offer to their workers at least one health plan which meets strict criteria for high-quality and low-cost care.
ESI should be preserved because it ensures ready access to good care in most cases. But its premiums also need to grow at a moderate pace to lessen the pressure on wage growth.
