Since World War II, employment-based health benefits have been the most common form of health insurance for non-poor and non-elderly individuals in the United States. In 2005, 62 percent of adults below the age of 65 and 57.5 percent of children were covered by an employment-based plan.1 As health reform takes on new prominence, the efficacy of this employer-based system is being debated. There is broad disagreement on across the political spectrum over whether employer-based coverage continues to make sense. This debate is not new. The conversation about fixing the employer-based system versus replacing it entirely has been ongoing since the late 1990s. Health care costs continue to outpace inflation; consequently, debate concerning reform of the employer-based system has again turned vigorous.
In February 2007, Andrew Stern, the President of the Service Employees International Union (SEIU); declared the employer-based benefit system “dead.”2 This pronouncement, from the head of the largest health care union in the country, reflects a growing frustration among employees with rising health care costs that directly affect them through higher out-of-pocket costs. According to the Kaiser Family Foundation’s 2006 Employer Benefit Survey, premiums have risen faster than overall inflation (3.5 percent) and wage gain (3.8 percent).3 In total, premiums have increased by 87 percent since 2000.4 Joining Stern was Lee Scott, CEO of Wal-Mart, who has partnered with Stern on forming the Better Health Care Together coalition. Wal-Mart’s partnership with SEIU—a constant critic of its business practices—demonstrates industries’ increasing concern that it cannot compete in a global economy with rising health care costs.5
While small businesses and large corporations alike have traditionally resisted any call for health care reform, many are now advocating for a new health care system, claiming the cost of employee healthcare is making it impossible to do business.6 However, there is no consensus on what this new health care system should be.7
A bill proposed by Senator Ron Wyden, crafted in conjunction with the CEO of Safeway, advocates replacing the employer-based system with an individual mandate for health insurance. People would be required to buy coverage on their own, and employers might increase wages to compensate for no longer having to purchase health insurance.8
In contrast, the Employee Benefit Research Institute (EBRI) has conducted research that indicates that the employment-based benefit system has not changed significantly since the 1980s.9 EBRI’s issue brief Employment-Based Health Benefits Access and Coverage 1998-2005, reveals that while “the percentage of workers with coverage from their own employer dropped from 68.4 percent in 1988 to 61.4 percent in 2005, the percentage of workers without health insurance throughout most of these years was in large part unchanged.”10 This research also suggests that a confluence of a strong economy, falling health care costs, and low unemployment might be creating the beginning of a drive for an expansion of employment-based coverage.11
Many businesses are promoting modifications to the employer-based system rather than a full-scale replacement. Alain C. Enthoven and Victor R. Fuchs report in “Employment-Based Health Insurance: Past, Present, and Future,” that there are several plausible scenarios for job-based insurance to flourish. The most likely scenario for this would be the enactment of employer mandates by many large states or the federal government.12 Additionally, individual mandates, where people could purchase their insurance through their employers, represents another possibility for continuing the employer-based system. For example, costs to individuals could be mitigated through employer-sponsored Health Savings Accounts (HSAs), High Deductible Health Accounts, and other tax-sheltered plans.
The Changes in Health Care Financing and Organization (HCFO) initiative has funded research on a variety of studies that examine employment-based health benefits; the studies’ results inform debate on all aspects of employer-based coverage and future policy. Daniel Polsky and colleagues at the University of Pennsylvania investigated health plan choices and adverse selection in employer-sponsored health insurance. Polsky concluded that the type of health plan coverage an employer offers affects whether its employees take-up insurance, but has a smaller effect on overall coverage rates for workers and their families because of the availability of alternative sources of coverage.13 Additionally, Polsky found no evidence that HMO plans attract a disproportionate share of low-risk enrollees. Practically, this indicates that there may be little need for employers to risk adjust insurance premiums or otherwise restrict employee choice of plan types.14
In another HCFO funded study, Anthony Lo Sasso and Bruce Meyer at Northwestern University examined the effect of Medicaid and uncompensated care provided by clinics and hospitals on insurance coverage. Their results provide mixed evidence on the extent of crowd-out. According to Lo Sasso and Meyer, hospital care appears to have little crowd-out effect, but clinic care does substantially crowd out private coverage in some circumstances.
Joel Cantor and colleagues at Rutgers, The State University of New Jersey, examined trends in enrollment in New Jersey’s Individual Health Coverage Program (IHCP), implemented in 1993. Two key components of the IHCP were pure community rating and guaranteed issue/renewal of coverage. Despite positive early evaluations, Cantor found through his HCFO-funded study that the program’s stability was fragile. He also concluded that, even as opportunities increased for job-related insurance coverage, the IHCP retained its high-risk enrollees.
These three grants are only a sample of the research that HCFO has funded in this area. A listing of other HCFO work relating to employer-based coverage follows:
Title: Sustaining Individual Health Insurance Markets Under Community Rating and Open Enrollment
Institution: Rutgers, The State University of New Jersey
Grant Period: April 2002 – September 2003
Principal Investigator: Joel Cantor, Sc.D.
What is the extent of risk selection in New Jersey’s Individual Health Coverage Program (IHCP), which was implemented in 1992 as part of the state’s individual market reforms? What are the policy options for sustaining access to individual health plans and describe the role of the non-group coverage in New Jersey’s health care insurance market? Using data from The Robert Wood Johnson Foundation-funded New Jersey Family Health Survey (NJFHS), the researchers aimed to answer the following questions: (1) How has the distribution of risk changed in the IHCP since 1995-6 and what are the implications of those changes for the viability of community rating and related reforms? (2) What is the potential impact on current or potential IHCP enrollees of adopting modified community rating? and (3) What role does the IHCP play in the continuum of coverage in New Jersey? The objective of this study was to analyze changes in New Jersey’s individual insurance market to inform state policymakers considering reforms to make non-group markets accessible and viable. The researchers supplemented the NJFHS data with a sample of 600 non-group subscribers (subscriber lists provided by top 4 or 5 carriers in state who cover 95% of lives in the individual market). Using the same methodological approach utilized by Swartz and Garnick in the early years of the IHCP, they assessed the risk of medical expenditures of adult IHCP enrollees compared to that of a contrast population comprised of individuals with non-small-group employment-based insurance. They also compared the IHCP enrollees with the entire employer-group market and the uninsured.
Title: Health Plan Choices and Adverse Selection in Employer-Sponsored Health Insurance
Institution: University of Pennsylvania
Grant Period: February 2002 - June 2003
Principal Investigator: Daniel E. Polsky, Ph.D.
Are HMOs able to offer lower premiums because of favorable risk selection or utilization savings? What is the relationship between health plan choices and risk selection? Using Round I CTS Household Survey (CTSHS) data to study the effect of risk selection in employer-sponsored health plans, researchers at the University of Pennsylvania found that lower HMO premiums could not be explained by favorable selection, nor was utilization lower for HMOs. The researchers applied their methodology from the earlier study and analyzed Round II CTSHS data. The researchers examined the influence an individual’s health risk has on his/her selection of an employer and whether employers choose their type of insurance based on the unmeasured health or health care utilization of their employees. As both the public and the private sector combat risk selection, this study sheds light on how risk selection affects health plan choice
Title: Studies of the Working Uninsured, Their Dependents and Insurance Reform on Their Behalf
Institution: The Urban Institute
Grant Period: June 2000 - July 2002
Principal Investigator: Linda J. Blumberg, Ph.D.
What are the effects of certain insurance market reforms that were designed to expand coverage? Researchers at the Urban Institute conducted several analyses looking at the working uninsured and these effects using the Current Population Survey (CPS), the National Survey of America’s Families (NSAF), and the National Health Interview Survey. In particular, they aimed to answer the following five questions: 1) Who are the working uninsured? 2) Why do employer-sponsored coverage rates vary across the 50 states? 3) Have health insurance market reforms affected the composition of insured risk pools? 4) Did HIPAA have any effect in the small group market? and 5) Why do so many workers in large firms lack health insurance? The objective of this series of studies was to provide a better understanding of the working uninsured in order to better inform the policy debate about coverage expansions and identify those interventions most likely to work.
Title: Business Views of Strengths and Weaknesses of the Employer-Based System for Providing Health Insurance Coverage
Institution: Economic and Social Research Institute (ESRI)
Grant Period: April 2000 - June 2001
Principal Investigator: Jack A. Meyer, Ph.D
What role do employers play in financing health care coverage? Researchers at the Economic and Social Research Institute first conducted a literature review of writings and research on the employer-based system, which included a review of new designs for the U.S. health care system made by scholars across a broad array of organizations, as well as a review of major national surveys conducted by RAND, the federal government, and others. The literature (and proposals for redesign) on employer financing and contribution policies were also reviewed. The results of the literature review was then used to outline the kinds of issues to address in the employer interview component of the study. The researchers conducted in-depth interviews with 50 to 60 employers to elicit information on what business leaders see as the essential ingredients for reforming the employer based system. They examined questions aimed at understanding how employers view the employer-based system, what problems it creates for them, and how they would respond to a variety of proposals to reform the system, including some that would eliminate the employer’s role. The objectives of the project were to provide policymakers with better information about the strengths and weaknesses of the employer-based system, as well as the implications for the future direction of reform, focusing on whether to repair the current system or replace it with an alternative design.
Title: Early Implementation Experience of Companies Offering internet-based Models for Employer Health Benefits
Institution: University of Minnesota
Grant Period: October 2000 - November 2001
Principal Investigator: Jon B. Christianson, Ph.D.
What is the impact of internet direct contracting (IDC) systems? In this first phase of the project, the researchers at the University of Minnesota contrasted the approach used by Vivius, Inc. with other internet-enabled models directed at the employer/employee health insurance market and tracked the implementation over the first eight months. A second evaluation phase followed. The researchers also endeavored to answer a number of practical questions that arose with the introduction of IDC models in response to a defined contribution model of health care delivery and financing. Their objective was to inform private and public policymakers on the implications of implementing an IDC model and the interactions between such a model and the market as a whole.
Title: The Transformation of Corporate Health Care Purchasing Institution: The Transformation of Corporate Health Care Purchasing
Grant Period: October 1998 - May 2001
Principal Investigator: James Maxwell, Ph.D.
How widespread are innovations in health care purchasing by large employers? The researchers built on their prior study of fourteen large U.S. companies to develop a better understanding of how and by whom health care is purchased within large, Fortune 500, firms. The study focused on the use of procurement practices such as competitive bidding, benchmarking and quality standards as well as on the organizational arrangements used to implement them. The objective of this project was to identify "best practices" among the companies and analyze the consequences and implications of changes in practice for firms, employers, and public policy.
Title: Controlling Risk Segmentation under Employment-based Medical Savings Accounts
Institution: University of Pennsylvania
Grant Period: April 1997 - October 1998
Principal Investigator: Mark V. Pauly, Ph.D.
How do employers decide whether to offer medical savings accounts (MSAs) to their employees? Researchers at the University of Pennsylvania’s Wharton School addressed the question of how employers in medium- and large-group firms think about MSA-induced risk segmentation in the health insurance market. They: 1) conducted a simulation analysis under different levels of premium reduction or employer contribution to the MSA account to analyze the financial impact of these different thresholds; and 2) surveyed employee benefit specialists and consultants and ask them whether, under various "realistic circumstances," they would choose to offer MSAs as an option and whether they would adjust the premium reduction/employer contribution to control the amount of risk segmentation. The objective of the study was to help inform the policy debate as to how medium and large-group employers say they would implement MSAs under various conditions.
Title: Evaluating the Use of Performance-Related Information and Financial Incentives in Employer Health Care Purchasing
Institution: Economic and Social Research Institute (ESRI)
Grant Period: January 1997 – March 1999
Principal Investigator: Jack A. Meyer, Ph.D
Are voluntary, employer-based purchasing coalitions an effective means of controlling health care costs while maintaining quality of care? Researchers at the Economic and Social Research Institute evaluated the effects of health care purchasing coalitions on health care costs, utilization, and quality. This grant supported the first two phases of what is likely to be a three phase project, including: 1) a process evaluation; 2) an assessment of intermediate outcomes; and 3) a quantitative impact evaluation. During phase one, the researchers assessed the purchasing activities of six coalitions across the country, including how they have been implemented, and how they compare to past purchasing practices. The objective of this research was to give employers and policymakers more information on the effectiveness of community-based efforts of business coalitions and individual companies to reform the way health care is purchased.
Title: Changes in Employer-Offered Health Insurance: Firms Decision Making & Employee Satisfaction
Institution: University of Pittsburgh
Grant Period: September 1996 - August 1999
Principal Investigator: Judith R. Lave, Ph.D.
How are changes in the health insurance environment affecting the health insurance benefits that employers offer, and how are these changes in insurance offerings affecting employee satisfaction? The goals of the project were to 1) describe the health benefit offerings, and how they have changed, for the 50 largest employers in the Pittsburgh metropolitan area; 2) investigate the decision-making process firms use to select and refine their health insurance offerings; 3) assess the extent to which the changes are influenced by selected firm and environmental characteristics; 4) determine consumer satisfaction with employer-offered health insurance following changes in offerings; and 5) assess and explain consumer selection of insurance plans. The study surveyed large employers (more than 200 employees) in the Pittsburgh metropolitan area. The researchers also conducted structured interviews with benefits officers or union officials. The objective of the study was to help policymakers understand and predict how changes in the marketplace will affect what health insurance employers offer, how satisfied employees will be with the new offerings, and to what extent employers are really acting as "agents" of their employees.
Title: Developing Risk Assessment Tools for Large Employers and Testing Risk Adjustment Approaches in Health Care Purchasing
Institution: Pacific Business Group on Health (PBGH)
Grant Period: June 1993 - November 1996
Principal Investigator: Patricia E. Powers
Can purchasers use one of two advanced risk assessment models for determining which health plans are most efficient, for negotiating individually and collectively with plans for better premiums, and for employers offering multiple plans, establishing their contributions to each plan based on the premium for the most efficient plan? The Pacific Business Group on Health (PBGH) 1) tested and refined two different practical methods for assessing the relative risk of enrollees in different companies offering a variety of managed health plans; and 2) applied these methods to several employer members of the PBGH. One method used self-reported health status data and the other used socioeconomic data abstracted from employees personnel files. Testing these risk adjustment tools with large employers provided public and private policymakers with information vital to understanding the implications of using such tools.
Title: The Rise in Employer Health Care Costs -- Phase 2
Institution: University of California-Irvine
Grant Period: November 1991 - December 1994
Principal Investigator: Paul J. Feldstein, Ph.D.
What factors have contributed to the rise in employer health care costs, and how can this information be used to design improved benefit packages and more effective cost containment policies? The second phase of this study, included three main types of analyses: 1) descriptive and multivariate analyses to examine changes in employee health expenditures and benefit-premium ratios, the factors contributing to the changes, and how these factors differ across firms; 2) an analysis of groups whose policies have been canceled, in order to identify factors that affect the likelihood of cancellation; and 3) a patient-level analysis comparing utilization of groups with high expenditure growth rates and groups experiencing low growth rates.
Title: The Rise in Employer Health Care Costs -- Phase 1
Institution: University of California-Irvine
Grant Period: August 1990 - October 1991
Principal Investigator: Paul J. Feldstein, Ph.D.
Why have employer health care costs increased so dramatically over the past few years? The University of California, Irvine conducted the first phase of a study to determine the extent to which various factors, including medical price increases, technology advances, employee and retiree demographics, and changes in employee benefit plans, contributed to the rise in employer costs from 1984-1990, and to estimate the effect of changes in benefit design on employee utilization and expenditures. During phase one, the project expanded an existing database to include premium, expenditure, and utilization data on over 150 insured employed groups and conducted preliminary multivariate analysis of this data.
1 Fronstin, P. “Employment-Based Health Benefits: Access and Coverage, 1988-2005,” Employee Benefit Research Institute Issue Brief #303, March 2007, p. 1.
2 Service Employees International Union, “SEIU Partnership to Spur Effort To Fix Health Care in America,” www.seiu.org/media/health_partnership.cfm.
3 Kaiser Family Foundation, “Employer Health Benefits 2006 Annual Survey,” p. 1, ex. A. Also see www.kff.org/insurance/7527/index.cfm.
4 ibid.
5 Kaiser Family Foundation, Daily Health Policy Report ,“Wal-Mart, SEIU Outline Themes to Meet Health Coverage Goal by 2012,” February 8, 2007. Also see www.kaisernetwork.org/daily_reports/rep_index.cfm?hint=38-DR_ID=42811.
6 Freudenheim, M. “New Urgency in Debating Health Care,” New York Times, April 6, 2007.
7 ibid.
8 Cohn, J. “What’s the One Thing Big Business and the Left Have in Common?,” New York Times Magazine, April 1, 2007.
9 Fronstin, P. “Employment-Based Health Benefits: Access and Coverage, 1988-2005,” Employee Benefit Research Institute Issue Brief #303, March 2005, p.1.
10 ibid, at p. 21.
11 ibid, at p. 4.
12 Enthoven, A and V. Fuchs, “Employment-Based Health Insurance: Past, Present, and Future,” Health Affairs, Vol. 25, No. 6, November/December 2006, p. 1538-1547.
13 Polsky, D. et.al. “Employer Health Insurance Offerings and Employee Enrollment Decisions.” Health Services Research, Vol. 40, No. 5 p1, October 2005.
14 Polsky, D., and S. Nicholson, “Why are Managed Care Plans Less Expensive: Risk Selection, Utilization, or Reimbursement?,” Journal of Risk and Insurance, Vol. 7, No. 1, March 2004, p. 21-40.
