Picwell Blog

Picwell Insights: The Role of “Capacity to Pay” in Employee Benefits Decisions (Part 2)

Sep 27, 2022 8:00:00 AM / by Picwell

In our last post, we covered the concept of employees’ “capacity to pay” for unexpected medical bills. As many as 40% of employees would not be able to afford a surprise medical bill of $1,000 or more, and, given this result, it's important for employees to consider their financial preparedness for unexpected costs when choosing benefits. 

In this post, we will take a look at the relationships between employees’ capacity to pay for unexpected medical bills, risk aversion, and income.

Risk Aversion

First, let’s take a look at the relationship between capacity to pay and risk aversion. In our post about risk aversion we found that lower income employees were more likely to fall into the “Low Risk Aversion” category. So, it would stand to reason that people with lower capacity to pay would tend to have lower levels of risk aversion. 

Is that what we actually see?

Surprisingly, it isn’t.

As we can see below, people who have the lowest levels of capacity to pay are more likely to have high levels of risk aversion. As capacity to pay increases, the odds of having a high level of risk aversion steadily decreases. 

Capacity to Pay and Risk Aversion Graph

When we look at the trends in this figure, we can see that as financial wellness increases, people become more willing to take on some risk - in the form of higher potential out-of-pocket costs - in exchange for guaranteed premium savings. This would put them in the low or medium risk aversion groups, depending on just how much risk they are willing to face.

So how does this square with the data that show risk aversion increasing with income?

As with many things, the answer is complicated, but a good place to start is by looking at the relationship between capacity to pay and income.


This figure shows how much employees could afford to pay for unexpected medical bills by income level. As we can see here, there is a pretty clear relationship between income and capacity to pay, but even within income groups, we see a lot of variation.

Capacity to Pay and Income Table

Let’s take a closer look at the lowest and highest income groups. As we would expect, many people in the lower income group cannot afford to pay a lot. About half (51%) of employees with an annual income less than $40,000 could not afford to pay a surprise bill of $1,000 or more, but, somewhat surprisingly, 20% of people in this group indicated that they could afford surprise bills of at least $3,000.

Among the highest income employees with annual incomes above $125,000, we see that 54% could afford surprise bills of at least $3,000, but 17% of these high earners said that they could not afford a surprise bill of $1,000 or more.

So what’s the conclusion here? While income and capacity to pay are pretty closely related, they do not move in lock-step. Some employees with lower incomes are well prepared for unexpected medical costs, and some higher income employees are not.

We get it. Life is complicated and a lot of things contribute to financial wellness.

Exploring the Relationship Between Income, Financial Wellness, and Risk Aversion

If we dig down a little further into the data, we can shed a little more light on the complicated relationships between income, financial wellness (or capacity to pay), and risk aversion. In the graph below, we divided employees into groups based on their combination of income and capacity to pay for unexpected medical bills. The shade of each box indicates how risk averse each group is, with darker shades indicating higher average levels of risk aversion.

Capacity to pay, risk aversion, and income

As we can see here, the higher income employees who have a limited capacity to pay for unexpected medical bills are the most risk averse group, while the lower income employees who are well prepared for unexpected medical bills have the lowest levels of risk aversion.

When we put this all together, we can arrive at the somewhat counterintuitive results that risk aversion is higher among people with high incomes and lower among people who are well prepared for unexpected medical bills. The key to this result lies in the fact that a high income, on its own, does not guarantee financial wellness, and there is also a lesson in optimal benefit design here. 

Financial wellness

If the goal of your employee benefits is to improve the lives of your employees, it is important to focus on improving financial wellness by first understanding your employees’ financial situations and then giving them access to the tools and resources that they need to improve their situations.

This is where benefits decision support comes into play. Picwell DX can help improve employees’ financial wellness in several ways. The first (and most obvious) is by recommending the health care plans that will work best for their personal circumstances. In fact, employees who enroll in a Picwell recommended plan save $1000 more per year on average versus those who don’t!

But the guidance doesn’t stop there. Picwell DX also provides numerous educational modules to help employees better understand the value of savings accounts such as HSAs, FSAs, and HRAs. It even helps employees learn more about their supplemental benefits including 401(k)s, accident insurance, and critical illness insurance, just to name a few. 

Stay tuned for future posts where we will talk about how HSA planning tools and voluntary benefits play a part in improving employees’ financial wellness.

Topics: Benefits Decision Support, Health Insurance, employee benefits, health savings account, empower wise choices,, risk aversion, financial wellness


Written by Picwell