Monday, June 01, 2009

Employee vs. Consultant, Topic: Insurance

Today we'll talk about the differences in insurance between working as an employee and working for yourself. Yesterday I explained the difference between contracting and consulting, but both types are considered (by the IRS) to be self-employeed unless they receive a W2, and then you're an employee

Companies began providing insurance as a benefit to attract workers after the shortages in WW2. This benefit has grown into the extreme mess we call "health care" today in the United States. The problem here is that we spend the most on heathcare of any country yet do not receive the best care. Bear in mind, there will be a lot of economics discussion today, but it's necessary to understand the point.

Employers, being the de-facto providers of health care, have a few advantages going for them. The first is adverse selection. Every company will have some people who require recurring care (cancer, diabetes, etc) and some people who require no care, so the insurance pool overall will skew towards the median care requirement being right in the middle. Thus, the portion of insurance for each person will be say, $200, of which the employer picks up $150 and the employee pays $50. (Assuming a single person here). The employee portion of $150 is considered a benefit (and a tax writeoff) to companies.

Let's take the same person under a self-employed scenario. Now, this person knows their own health. We call this moral hazard. They know their favorite foods are cheese fries and buffalo wings. They also know their family history of heart disease. They do not reveal this to the insurance company though when this person purchases insurance for $200 a month, of which the insured is responsible for the entire amount.

There is another self-employeed person who is very fit, has no history of family disease, eats healthy, but balks at paying $200 for heath insurance the person does not think he needs. This is where adverse selection comes into play, as only the sick people or people who believe they will need care buy insurance, and the healthy do not. That is why private cost plans are cost prohibitive. There are some ways around this, as credit unions and other firms try to "pool" people together to buy insurance at discounted rates, to "pull" both of the people (heathly and unhealthy) to buy insurance and average out the risk again. However, this still presents major problems for insurers, who are in the business to make a profit.

Now we enter into the political debate as to whether to force people to buy insurance on the private market, providing the pooling mechanism, or to have the insurance provided by the federal government which again provides pooling. I'm not going to get into this futher except to state that either of those options is preferable to me versus the current option of employers providing insurance.

For those who accept the risks of self-employment and need insurance, there are multiple things you can do. First is to buy a full plan on the open market, which is very cost prohibitive. There is something called a HSA (Health savings account) which when linked with a high-deductible plan, allows people to retain insurance for catastrophic occurences but also has high deductibles to discourage the overuse of the insurance. (If you're interested, this is what I do). If you're married to a partner who has corporate insurance, maybe the best option is to use that person's plan.

If you're going to consider the cost of health insurance in your criteria, factor in the full cost. Employee contibution is $50 every two weeks, and private insurance is $100 a month. Therefore, the premium expense is equal. There are other costs to be factored in here, such as office visit deductibles, but remember that cash is king, and while on corporate insurance I had a prescription once that was a $37 co-pay, but only $21 cash price.

If you're thinking of becoming self-employeed understand that there are options available to you, and with the looming discussion of health-care reform, the options may be more attractive and remove it as a key decision making point in the future.

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