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MARKETWATCHJob-Based Health Benefits In 2002: Some Important Trends
Based on a national survey of 2,014 randomly selected public and private firms with three or more workers, this paper reports changes in employer-based health insurance from spring 2001 to spring 2002. The cost of health insurance rose 12.7 percent, the highest rate of growth since 1990. Employee contributions for health insurance rose in 2002, from $30 to $38 for single coverage and from $150 to $174 for family coverage. Deductibles and copayments rose also, and employers adopted formularies and three-tier cost-sharing formulas to control prescription drug expenses. PPO and HMO enrollment rose, while the percentage of small employers offering health benefits fell. Because increasing claims expenses rather than the underwriting cycle are the major driver of rising premiums, double-digit growth appears likely to continue.
Last year in this journal we reported that the cost of job-based health insurance increased from 2000 to 2001 at the highest rate since 1991 but that a strong labor market had shielded American workers from higher costs. The 2002 survey indicates that premium increases continue to escalate and that U.S. workers face continued increases in what they pay for health insurance. Job-based insurance covers more than 175 million Americans. This includes 159 million active workers and their dependents, 12 million early retirees under age sixty-five, and 4 million Medicare-eligible retirees.1 The availability of employer coverage is closely linked to having health insurance. However, because not all employers offer health benefits, more than 80 percent of the uninsured reside in families in which a household member works full or part time.2 This paper reports on employer-sponsored health insurance in 2002 and how it has changed over the past fifteen years. We review many features of job-based health insurance, including the cost of coverage, employee cost sharing, the role of managed care, prescription drug costs and coverage, coverage of workers and retirees, and employers’ attitudes about the future of employer-based health insurance. We assess the likely changes in health insurance within the next few years.
This is the fourth year of the annual Henry J. Kaiser Family Foundation/Health Research and Educational Trust (Kaiser/HRET) Survey of Employer-Sponsored Health Benefits. Core elements of the survey are a continuation of earlier surveys conducted by the Health Insurance Association of America from 1987 to 1991 and by KPMG Peat Marwick from 1991 to 1998. The survey questionnaire requests information about the employer’s largest conventional, health maintenance organization (HMO), preferred provider organization (PPO), and point-of-service (POS) plans. Using computer-assisted telephone interviewing, National Research LLC conducted telephone interviews with employee benefit managers from January 2002 to May 2002. The 2002 national survey includes 2,014 randomly selected public and private firms, of which 1,092 participated in the survey in 2001. Employers range in size from three workers to hundreds of thousands of workers. Kaiser/HRET selects 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. The overall response rate was 50 percent, identical to the 2001 figure. Our experience from prior surveys indicates that firms not offering health benefits to their workers are less inclined to participate in the survey. Therefore, we asked one question of firms declining to participate in the full survey: "Does your company offer or contribute to a health insurance program as a benefit to your employees?" A total of 1,248 nonresponding firms answered this one question. When estimating the percentage of firms offering health coverage to their workers, we use the broader sample of firms, including those firms that declined to participate in the full survey.3 Because sampled firms are chosen randomly, it is possible to use statistical weights to extrapolate results to national as well as firm-size, regional, and industry figures. We calculated weights by determining the basic weight and applying first a nonresponse adjustment, and then a poststratification adjustment.
Premium increases. Premiums increased 12.7 percent from spring 2001 to spring 2002, the second consecutive year of double-digit growth (Exhibit 1  ). This is the largest increase in the cost of health insurance since 1990 and represents the sixth consecutive year of accelerated premium growth. Premium increases outpaced the overall rate of inflation by more than eleven percentage points.
Increases in premiums varied little by type of plan. The cost of coverage rose 13.3 percent among HMO plans, 12.7 percent among PPO and conventional plans, and 11.9 percent among POS plans. Increases were similar across all regions of the nation. Small firms with three to nine workers experienced the largest increases (14.5 percent, compared with 13.0 percent for employers with 5,000 or more workers). About one-third of all employees worked for a firm whose premiums increased by more than 15 percent. Two factors usually explain growth in the cost of health insurance. The first is the underwriting cycle—the interrelated cyclical pattern of profitability and premium increases that in recent years has led to increased premiums to compensate for health plans’ underwriting losses in previous years.4 This cycle ultimately corrects itself. But a more serious concern with current double-digit premium increases is the indication that inflation reflects a jump in underlying claims expenses—the second explanatory factor. By comparing increases in premiums for self-insured and fully insured plans, one can assess the roles of the underwriting cycle and underlying claims in the current round of increases. For self-insured plans—which pay claims directly and therefore do not reflect the cyclical patterns associated with premiums paid to health plans—the increased cost of premium equivalents reflects expected increases in medical claims expenses.5 In con trast, premium increases in fully insured plans reflect not only the increased cost of health care but also the "catch-up" pricing aspect of the underwriting cycle. In 2002 premium equivalents in self-insured plans rose an average of 12.5 percent, as opposed to 13 percent for fully insured plans. This is a departure from recent years, when increases in fully insured plans greatly outpaced those in self-insured arrangements. Thus, surging underlying medical claims expenses, rather than catch-up pricing, is now largely driving today’s double-digit increases in the cost of health insurance.
Cost of coverage.
The average monthly cost of single coverage in 2002 was $255 (or $3,060 a year), and the cost of family coverage was $663 or ($7,954 a year) (Exhibit 2
Employee cost sharing. As the economy weakened and demand for workers diminished, employees experienced dramatic increases in their monthly contributions for health insurance in 2002, as well as growth in deductibles and copayments (Exhibit 3 ). The average contribution for single coverage—which had fallen from $37 in 1996 to $30 in 2001, while competition for workers was strong—rose 27 percent to $38 in 2002. Contributions for family coverage increased 16 percent from 2001 to 2002. With rising employee contributions, fewer workers had no contributions required in 2002. For example, among small firms (3–199 workers) the percentage of employees receiving free single coverage fell from 57 percent in 2001 to 44 percent in 2002. Among large firms, the percentage of employees with free family coverage fell from 9 percent to 4.5 percent.
Cost sharing at the point of service rose dramatically as well. For example, in-network deductibles in PPO plans rose 37 percent from 2001 to 2002 (Exhibit 3  ). Deductibles in conventional plans increased by 38 percent. In HMO plans the percentage of employees facing a copayment of $15 or greater rose from 26 percent in 2001 to 40 percent in 2002. In general, large firms responded more quickly to the less restrictive employment market and rising cost of health care by raising cost-sharing requirements. For example, in-network deductibles in PPO plans among small employers rose 11 percent to $311 in 2002, while among large firms they rose nearly 60 percent to $259. Health plans have also begun to adopt new forms of cost sharing to control the cost and use of health care services. Reflecting substantial growth in a relatively recent product development, 5 percent of workers enrolled in HMO and PPO plans now face tiered networks for hospital services, where patient cost sharing varies across different "tiers" of in-network providers. Prescription drug expenses. Rising prescription drug costs continue to be a major factor driving increases in health insurance premiums. Since 1998 medical claims expenses for prescription drugs have increased by 14–18 percent each year.6 In 2002 the average increase in premiums for carve-out drug plans—where drug coverage is purchased and managed separately—was 16 percent. To control rising drug costs, employers have adopted drug formularies and placed employees at greater financial risk if they purchase brand-name drugs when generics are available. Thus, the percentage of workers enrolled in a plan that uses a formulary has grown from 46 percent in 2000 to 69 percent in 2002. More than 57 percent of workers with prescription drug benefits now face a three-tier cost-sharing formula, in which the patient’s responsibility varies based on the type of drug prescribed—up from 28 percent in 2000 and 36 percent in 2001.7 Consequently, employees now pay an average copayment of $26 for brand-name drugs with generic substitutes, compared with $16 in 2000 and $20 in 2001. In contrast, the average copayment when using generic drugs is $9, up from $8 in 2000. Covered benefits. In addition to increasing patient cost-sharing requirements, some employers have reduced the overall level of covered services as well. Seventeen percent of employees worked for a firm that reduced the level of benefits in 2002, compared with only 7 percent in 2000 and 11 percent in 2001. Employees in retail firms (32 percent), firms employing a large share of low-earning workers (25 percent), and firms located in the South (23 percent) were most likely to see reductions in the level of covered benefits.8
Plan enrollment.
Movement toward less restrictive forms of managed care continues this year, although erosion in HMO enrollment appears to have subsided. Enrollment in PPO plans has been growing steadily since 1996, and PPOs now cover more than half of workers (Exhibit 4
Changes in enrollment reflect (1) changes in the percentage of workers who may select different plan options and (2) the likelihood that employees select certain plans, when offered a plan. Stable HMO enrollment is due in part to the increasing number of employees with the option to elect HMO coverage, up from 46 percent in 2001 to 53 percent in 2002. Only 16 percent of employees now have a choice of conventional plans, compared with half of all workers in 1996. Stable HMO enrollment may also be an indicator that HMOs are more appealing to consumers now that many provide greater choice among physicians and hospitals and some offer less restrictive access to care. One-tenth of workers in HMOs are in plans that over the past three years have eliminated a requirement to obtain a referral before seeing a specialist; 11 percent are in plans that have done away with utilization review. Moreover, 49 percent of employees enrolled in HMOs now have expanded choice among physicians, and 32 percent have more choice among hospitals.
Availability of coverage.
As the economy continued to struggle and premiums rose at double-digit rates for the second year in a row, the brief period of expanding employer-sponsored health coverage has come to an end. After rising substantially from 1998 to 2000—and fueling a historic decrease in the overall number of uninsured persons—the percentage of small businesses (3–199) offering health benefits fell slightly from 67 percent in 2000 to 62 percent in 2002 (p < .1) (Exhibit 5
Small businesses that do not offer coverage have historically cited the cost of insurance and the belief that employees have alternative sources of available coverage as the primary reasons for not doing so. That continues to be the case, although more small employers (3–199 workers) now point to high premiums as an important reason for not offering coverage (84 percent, compared with 73 percent in 2001), and fewer cite availability of coverage elsewhere (60 percent, compared with 71 percent in 2001). Among employers that do not now offer coverage, 18 percent say that they previously did so, illustrating a substantial degree of instability in the availability of health benefits (particularly among small firms). When employers offer coverage, not all workers are eligible to take advantage of the benefit. For example, among firms offering health coverage, fewer than half (48 percent) extend eligibility to part-time workers, and only 9 percent make it available to temporary employees. Overall, 79 percent of workers in firms offering health benefits are eligible for coverage, and 84 percent of eligible workers take it up. This means that one-third of workers in firms offering insurance are not enrolled in the employer’s plan, either because they are not eligible or because they do not take it up (likely because of the cost of the coverage or because they have other coverage available). With recent increases in unemployment, policymakers have increasingly turned their attention to provisions from the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986, the federal law that permits workers to retain insurance from a former employer if they pay the full premium. Coverage under COBRA can be expensive—requiring former workers to pay the combined employer and employee share of the premium, plus a 2 percent surcharge—and employers report that just 20 percent of workers eligible to enroll in COBRA coverage continuations do so. Retiree coverage. A number of statistics indicate erosion in retiree coverage. The nation’s largest firms (5,000 or more workers) were less likely to offer retiree coverage in 2002 than 2001; an estimated two-thirds of retirees with employer coverage receive it from these very large firms. In the past two years 9 percent of large firms with 200 or more workers have reported dropping coverage for new hires or active workers, and 7.5 percent of these large firms say that they are likely to drop such coverage within the next two years.
Last year we reported that in a tight labor market, employers were willing to endure increasing premiums without decreasing the availability of health coverage or shifting costs substantially to workers.9 We suggested, however, that change might be imminent, and our predictions have proved to be true. Nudged by the sixth consecutive year of escalating premium increases and a downturn in the economy, employers are no longer holding the line. With 61 percent of employers saying that their ability to attract and retain high-quality workers is easier than a year ago, the proportion of employers offering health coverage appears to be shrinking somewhat, and employees’ payments for premiums and cost sharing are growing. Perhaps the most disturbing finding from this year’s survey is that accelerating medical claims expenses, rather than the self-correcting underwriting cycle, are at the heart of today’s dramatic rise in premiums. The implication is that the nation may be facing many years of double-digit premium increases. As the trends that many have predicted are now upon us—with the return of health care costs as a central concern for employers and employees—what does the future hold? Our survey suggests that if premiums continue to escalate, we will likely see renewed struggles over who pays for health care and how to control costs. If premiums were to rise 20 percent, 60 percent of employers say that they would be likely to increase what employees pay for coverage, and 56 percent say that they would reduce the scope of benefits. A few say that they would likely drop coverage (10 percent) or restrict eligibility for benefits (19 percent). In addition, employers show little interest in defined-contribution plans, in which the employer drops coverage entirely and gives employees cash to purchase health insurance on their own. Just 6 percent of employers say they are "very likely" to adopt such an approach, and 17 percent say that it is "somewhat likely." This may be due at least in part to the fact that 66 percent of employers offering coverage today say that they believe workers would find such an approach less attractive than the current structure of employer-sponsored benefits. With a realization that such "pure" defined-contribution plans are unlikely to attract much interest, so-called consumer-driven health products today fall into two primary models. The first model combines a high-deductible insurance plan with employer contributions to a health spending account to cover a portion of routine medical expenses. However, 64 percent of employers say that these plans would be unattractive to workers as well. The second model permits employees to use Web-based tools to select among predetermined benefit options that specify the breadth of provider networks. Ultimately, if employees bear greater financial risk for choosing more comprehensive benefits and broader networks, recent trends toward broader provider networks and reduced medical management could be reversed.10 Much of the current health care environment is reminiscent of the years in the late 1980s and early 1990s leading up to a national debate over health care reform and the rise of managed care: double-digit premium increases, growing worker contributions, and declining availability of coverage. Yet while a decade ago we had the potential promise of managed care or health reform to look forward to, today’s outlook for the future remains uncertain. Employee cost sharing is on the rise, and more than one million Americans are enrolled in "consumer-driven" health plans.11 So far, this represents a very small percentage of all people enrolled in employer-sponsored health plans and, even with rapid growth, is unlikely to constitute a sizable share of the market for several years. In 1992—before the rise of managed care and the subsequent backlash—HMOs had a documented history of delivering comparable or better care at a lower cost than fee-for-service plans could do.12 No such evidence exists for these new plans; nor do we have a measure of whether employees will embrace this new form of restriction on the scope of their coverage. The year 2002 was one of noteworthy but discouraging statistics—accelerating premiums, sharply increased cost sharing, and declining coverage. The dramatic increases in cost sharing are likely to be a harbinger of things to come, particularly as companies face the reality that the factors contributing to the cost of health care services are growing rapidly. If the U.S. economy remains sluggish, with less competition for workers, many employers will be able to pass higher health care costs on to employees without fear of losing workers. This will in turn reduce the number of workers, particularly low-income workers, who have access to or are able to take up coverage. Furthermore, with purchasers seeking new tools to constrain rising health care costs to fill the void left by the retreat of tightly managed care, we could be on the cusp of fundamental changes in the underlying structure of employer-provided health coverage. It seems evident that both purchasers of health care and their employees face difficult decisions ahead, with regard to the cost and scope of coverage. Although the future remains unclear, these decisions will have important implications for the financial burden faced by workers, the erosion of employer-sponsored health insurance, and future opportunities for expanding coverage.
Jon Gabel is vice-president, health system studies, at the Health Research and Educational Trust (HRET) in Washington, D.C. Also at HRET, Jeremy Pickreign is a statistician, Heidi Whitmore is a senior research associate, Kelley Dhont is a research associate, and Samantha Hawkins is a research assistant. Larry Levitt is vice-president and director of the Changing Health Care Marketplace project, Henry J. Kaiser Family Foundation, in Menlo Park, California. Also at the Kaiser Family Foundation, Erin Holve is a senior policy analyst, and Diane Rowland, executive vice-president. The authors thank Drew Altman, Gary Claxton, and Tony Fiori for their useful comments, and Jenna Rabideaux and Jain Wang for their helpful administrative support.
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