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Job-Based Health Insurance In 2001: Inflation Hits Double Digits, Managed Care Retreats

Abstract

 
Drawing on the results of a national survey of 1,907 firms with three or more workers, this paper reports on several facets of job-based health insurance, including the cost to employers and workers; plan offerings and enrollments; patient cost sharing and benefits; eligibility, coverage, and take-up rates; and results from questions about employers’ knowledge of market trends and health policy initiatives. Premiums increased 11 percent from spring 2000 to spring 2001, and the percentage of Americans in health maintenance organizations (HMOs) fell six percentage points to its lowest level since 1993, while preferred provider organization (PPO) enrollment rose to 48 percent. Despite premium increases, the percentage of firms offering coverage remained statistically unchanged, and a relatively strong labor market has continued to shield workers from the higher cost of coverage.

Job-based coverage remains a cornerstone of American health insurance, directly affecting 153 million active U.S. workers and their dependents and more than five million early retirees.² However, it remains beyond the reach of forty-two million Americans, nearly 80 percent of whom have a family member who works either full or part time.³ As insurance premiums rise, putting additional pressure on employers, we could begin to see erosion in offer rates, an increase in worker cost sharing, and ultimately an increase in the number of uninsured persons.

This paper reports on the state of employer-based health insurance in the spring of 2001 and how it has changed over the past year and since 1988. We review the cost of health insurance to employers and workers; plan offerings and enrollments; patient cost sharing and benefits; and eligibility, coverage, and take-up rates.

Study Methods

Top Study Methods Survey Findings Discussion And Policy... NOTES

 
The Henry J. Kaiser Family Foundation/Health Research and Educational Trust (Kaiser/HRET) Survey of Employer-Sponsored Health Benefits is an annual survey of employer-based health benefit plans, now in its third player. The survey’s core elements are a continuation of the KPMG peat Marwick surveys conducted from 1991 to 1998 and the Health Insurance Association of America-Sponsored survey of employers conducted from1987 to 1991. From January to May 2001, National Research LLC conducted Telephone interviews with employee benefit managers.⁴ The survey questionnaire asks a series of questions about the employer’s largest indemnity, health maintenance organization (HMO), preferred provider organization (PPO), and point-of-service (POS) plans. National Research completed interviews with 1,907 public and private employers ranging in size from three to hundreds of thousands of workers.

Kaiser HRET draws its sample from a listing of the nation’s employers compiled by Dun and Bradstreet. The sample is stratified by firm size (number of workers) and industry. This year’s sample includes employers that participated in the 1999 and 2000 surveys.⁵ The overall response rate was 50 percent, up from 45 percent the previous year.

From analyzing earlier data, Kaiser/HRET researchers have learned that firms not offering health benefits are less inclined to participate in the survey. Therefore, we asked one question to firms that declined to participate: "Does your company offer or contribute to a health insurance program as a benefit to your employees?" A total of 827 nonresponding firms answered this one question. When estimating the percentage of firms offering coverage to their workers, we use the broader sample, including those firms that declined to participate in the full survey.⁶

Since the firms in the sample are chosen randomly, it is possible to use statistical weights to extrapolate results to national, firm-size, regional, and industry figures. We calculate weights by determining the basic weight, applying a nonresponse adjustment, and then applying a post-stratification adjustment. Our data as presented here are employee weighted except where we explicitly note that they are employer weighted.

Survey Findings

Top Study Methods Survey Findings Discussion And Policy... NOTES

 
Rising premiums. Health insurance premiums rose 11.0 percent from the spring of 2000 to 2001, the largest rise since 1992.⁷ Health care inflation continues to gather momentum, with premium increases accelerating from 4.8 percent in 1999 to the current 11.0 percent figure (Exhibit 1). Premium increases far outpaced overall inflation (3.3 percent) and wage gains for nonsupervisory workers (4.4 percent).

View larger version (25K): [in this window] [in a new window] EXHIBIT 1 Health Insurance Premium Increases Compared With Other Indicators, 1988–2001

Two factors underlie the current inflation in job-based health insurance. The first factor, the health insurance underwriting cycle, is a self-correcting phenomenon. This is the traditional cycle of profitability and pricing in the health insurance industry since 1965. When insurers are earning underwriting profits (profits before investment income), they enter new geographic markets and try to accumulate market share by underpricing their competitors. Fierce price competition emerges, so that most insurers eventually suffer financial losses. Insurers then alter their strategy to restore profitability and exit from many local markets. With fewer insurers competing in local markets, it becomes easier for insurers to execute "catch-up" pricing. In 1996, a year when premiums increased just 0.8 percent, nearly three-fourths of insurers suffered underwriting losses, setting off the current wave of "catch-up" pricing.

The second force is the resurgence of underlying claims expenses—expenses that insurers pay to providers for services. For self-insured firms, changes in premium equivalents are a proxy for trends in expected claims expenses. Premium equivalents rose 9.5 percent in 2001, up from 7.1 percent in 2000 and 3.7 percent in 1999. Premiums increased 12.3 percent for fully insured plans, which indicates that insurers are raising their prices faster than claims expenses are growing. Growth in underlying expenses is a serious threat because it drives the long-run path of health care premiums.

One of the primary factors driving increases in health care costs is the rising expense of prescription drugs.⁹ Although employers are generally pessimistic that any approach will be very effective at controlling drug costs, 40 percent of companies surveyed said that government regulation of drug prices would be "very effective" at controlling drug costs. Price negotiations between plans and drug manufacturers, limits on consumer advertising, and higher copayments for brand-name drugs relative to generics were each cited by about one-quarter of firms as being very effective. Employers had the least confidence in pharmacy benefit management (PBM) companies (13 percent said they would be "very effective"), followed by drug formularies and regional purchasing pools.

Cost of coverage. The average cost of single coverage rose to $221 per month; family coverage, $588. These figures represent the sum of the employer and employee’s contributions. Indemnity plans remain the most expensive, averaging $238 for single and $640 for family coverage, while HMO plans cost the least, averaging $200 and $545, respectively.

Employee contributions and cost sharing. Despite the largest increase in the cost of coverage in nearly a decade, employees did not bear a statistically significant increase in the percentage of the premium they must pay for single or family coverage (Exhibit 2). Employees contribute on average 15 percent of the cost of single and 27 percent of the cost of family coverage. In nominal dollars, the $30 employees pay for single coverage per month in 2001 is less than they paid in 1996 or 1993.

Copayments rose in HMO and POS plans. Roughly half of HMO and POS plan enrollees face copayments of $10, and one-quarter face copayments of $15, for office visits. A $15 copayment is more than twice as likely as a $5 copayment in 2001, the reverse of the situation in 1999.

Covered benefits. In a year of record increases in the cost of coverage, when asked how the level of covered benefits changed over the past year, employers indicated that for about 80 percent of covered workers, benefits remained the same. Roughly equal numbers of employers improved and cut back on their benefits.

Prescription drugs are almost universally covered in private job-based insurance (98percent of employees). Health plans continue to provide preventive benefits as a standard part of the benefit package. For example, an annual exam with an obstetrician/gynecologist (OB/GYN) is covered for 97 percent of HMO and POS enrollees, 93 percent of PPO enrollees, and 81 percent of indemnity enrollees. Family planning services are not so generously covered; for example, only 67 percent of employees have coverage for sterilization. While 64 percent are covered for oral contraceptives, only 41 percent have coverage for all types of reversible contraceptives, and 31 percent have coverage for abortion services.

Plan enrollment. The shift in enrollment continues from managed care "heavy" to managed care "light" and is accelerating. PPOs now enroll 48 percent of employees, up from 28 percent in 1996 (Exhibit 3). HMOs, in contrast, now enroll just 23 percent of employees, and indemnity enrollment has fallen sharply. The West remains the last bastion of HMO enrollment, with a 40 percent market share. In the South PPOs constitute 57 percent of enrollment (data not shown).

View larger version (25K): [in this window] [in a new window] EXHIBIT 3 Health Plan Enrollments For Covered Workers, Selected Years 1996–2001

Workers today can choose from a different set of plans than they could in 1996, the high-water mark for HMO enrollment. This altered mix has contributed to the growth of PPO enrollment and the decrease in HMO enrollment. The percentage of employees who may choose an HMO plan has fallen from 64 percent in 1996 to 46 percent in 2001. In contrast, more workers can select a PPO plan, with the percentages growing from 45 percent in 1996 to 71 percent in 2001. The decline of HMO enrollment is due to a combination of slightly fewer firms offering the plan option and fewer employees choosing to enroll.

Extent of coverage. With signs of a weakened economy and escalating premium inflation, the brief period of increasing employer coverage may be coming to an end. In 2001, 65 percent of all small firms (3–199 employees) offered health coverage to their workers, down (although statistically unchanged, p < .05) from 67 percent in 2000 (Exhibit 4). Employer offer rates had been rising since 1998.

View larger version (25K): [in this window] [in a new window] EXHIBIT 4 Percentage Of Firms Offering Health Benefits, By Firm Size, Selected Years 1996–2001

However, when a firm offers health insurance, not all workers get covered. Some employees are not eligible to enroll because of waiting periods or minimum-work-hour rules, and others choose not to enroll because they must pay a share of the premium or they have other coverage available. Among all large firms (200 or more workers) that offer health coverage, 58 percent of workers are in firms that provide eligibility to part-time employees (compared with just 27 percent of workers in smaller companies). Only 7 percent of workers in large firms and 3 percent in small firms work for companies that allow temporary workers to be eligible for coverage.

Retiree coverage. While virtually all plans with firms’ largest enrollment of Medicare-age retirees include drug coverage, the availability of employer-provided retiree health benefits in general continues to fall. Thirty-four percent of all large firms offer retiree health coverage, down from 66 percent in 1988. Just 3 percent of all small firms offer retiree benefits in 2001, down from 9 percent last year. New accounting rules caused employer-provided retiree coverage to decline in the 1990s; the more recent decreases may be attributable to rising premiums, fueled by increasing drug costs. Prescription drug expenses account for 50 percent of claims expenses for Medicare-eligible retirees.¹⁰

Contribution policies. Many business and public policy conferences address whether employers will move to "defined-contribution" plans—where, in the extreme, employers would provide workers with cash to buy insurance on their own. Our survey still finds only modest enthusiasm for the idea among employers: 24 percent of all small firms and 13 percent of all large firms say they are very or somewhat likely to switch to a defined-contribution plan in the next five years (compared with 20 percent and 16 percent, respectively, last year).

Discussion And Policy Implications

Top Study Methods Survey Findings Discussion And Policy... NOTES

 
Over the past few years, declining numbers of uninsured Americans attest that employers are more willing to endure inflationary discomfort during a tight labor market. However, it remains to be seen how they will respond in a lagging economy. Our results this year have not indicated much reduction in the health insurance offer rate, or a dramatic shift toward increased employee cost sharing, or a reduction in plan choice, but history suggests that change may be imminent.

Heavily managed care appears to be in full retreat, with HMO market share lower than any time since 1993. Other sources indicate that networks are broader, and use of medical management techniques—such as gatekeepers and preadmission review—to control costs has declined.¹¹ Record-low unemployment rates since 1997 have contributed to the decline of heavily managed care.¹²

Benefit consultants and insurers are now considering "defined contribution"—limiting employers’ liability—rather than medical management as a strategy for bringing their costs under control.¹³ Increasingly, managed care plans are finding it difficult to stand between physicians and their patients—particularly as managed care market share declines. As a result, we may see more employers seeking to transfer financial risk to employees through greater cost sharing.

History demonstrates that there are no painless ways to control rising health care costs, and the options are limited. Past fixes point toward a finite set of unpopular options: managed care, a form of nonprice rationing; increased cost sharing for workers, which hits low-income workers hardest; and government price controls, which most economists believe are ineffective and ultimately lead to shortages. Perhaps the next chapter in the story will provide more answers, but the warning signs of increasing premiums are worrisome.

Editor's Notes

 
Jon Gabel, Jeremy Pickreign, Heidi Whitmore, Kelley Dhont, and Samantha Hawkins are with the Health Research and Educational Trust (HRET). Larry Levitt, Erin Holve, and Diane Rowland are with the Henry J. Kaiser Family Foundation.

We thank Drew Altman and Mary Pittman for their useful comments, and Jain Wang for her helpful research assistance.

NOTES

Top Study Methods Survey Findings Discussion And Policy... NOTES

 

1. J. Gabel et al., "Job-Based Health Insurance in 2000: Premiums Rise Sharply While Coverage Grows," Health Affairs (Sep/Oct 2000): 144–151.
2. Unpublished estimates from the U.S. Census Bureau, Current Population Survey, from Paul Fronstin, Employee Benefit Research Institute.
3. P. Fronstin, The Working Uninsured: Who They Are, How They Have Changed, and the Consequences of Being Uninsured, EBRI Issue Brief no. 224 (Washington: EBRI, August 2000).
4. Although the initial request is to interview the employee benefit manager or individual "most responsible about your health plan," in the case of large employers the interviewee may be an employee assigned to respond to the survey by the benefit manager. For small firms, the benefit manager may be an owner or an office manager with the responsibility for overseeing benefits.
5. Similar to other years, the sample includes firms from previous years’ samples (a historical panel of firms) and firms interviewed for the first time. Each firm is assigned a sample weight based on the inverse probability of its inclusion.
6. The response rate for this one question was 71 percent.
7. KPMG Peat Marwick, Health Benefits in 1992 (Montvale, N.J.: KPMG, 1992).
8. Differences by plan size are statistically significant (p < .05). Differences between PPO and POS plans are significantly different, but other two-way comparisons are not.
9. C. Hogan, P. Ginsburg, and J. Gabel, "Tracking Health Care Costs: Inflation Returns," Health Affairs (Nov/Dec 2000): 217–223.
10. Hewitt Associates, Retiree Health Trends and Implications of Possible Medicare Reforms, Report prepared for the Henry J. Kaiser Family Foundation (Menlo Park, Calif.: Kaiser Family Foundation, 1997).
11. C. Lesser and P. Ginsburg, Back to the Future? New Cost and Access Challenges Emerge, Issue Brief no. 35 (Washington: Center for Studying Health System Change, February 2001).
12. Ibid.
13. Defined contribution is most strictly defined as giving cash to employees so they can purchase health insurance themselves. More recently, many companies think of defined contribution as a program where the employer contributes a fixed amount to each employee eligible for health coverage. The employee may use these dollars to select among a limited number of health benefit options.

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