Employer Responses to Rising Health Insurance Costs

Employer health care costs are projected to rise by 12 percent in 2004, marking the fifth consecutive year of double-digit increases.¹ The Office of Personnel Management announced an average premium increase of 10.6 percent for the Federal Employees Health Benefits Program (FEBHP); the increases in the FEHBP are generally significantly less than the national average.² While there did appear to be a slowing in underlying health care spending in 2003,³ premium increases were generally higher than health care inflation, most likely due to insurers pricing to recoup prior losses.⁴

Although large employers are more likely to offer insurance than small employers, the average rates of premium increase were similar across firm sizes and industries, according to a survey conducted by the Kaiser Family Foundation and the Health Research and Educational Trust. Premiums are generally highest in the Northeast and lowest in the West, although they increased fastest in the West.⁵

These substantial premium increases are reminiscent of those from the late 1980s and early 1990s, when health care inflation was as high as 15 to 20 percent per year and the economy was sluggish. At that time, employers turned to tightly managed care products, which relied on cost-containment strategies that led to restricted access to care. But now, nearly a decade later, tightly managed care has declined significantly, due in large part to consumer and provider dissatisfaction. It is unclear how employers will respond to the current round of cost increases, although it is unlikely they will return to restrictive managed care models.⁶

Theory suggests that employers have different perspectives regarding the role of health insurance for their workforce. Christianson and Trude⁷ have summarized the literature and identified three distinct perspectives:

• Health benefits as compensation, where health benefits are looked at as part of an overall package of compensation (including salary and other benefits) that are used to attract and retain workers;
• Health benefits as a target for cost reduction, where such benefits are seen as a business cost center, and efforts to reduce costs could provide a competitive advantage; and
• Health benefits as part of their infrastructure, where employers are required to provide insurance (e.g., because of collective bargaining) and so seek the least costly way of doing so.

Employers’ actions seem to comport with theory, and efforts to reduce insurance costs reflect the different roles that health insurance plays for employers. Some employers, especially large ones, seem to be shifting costs back to employees in the form of higher premiums.⁸ Increased cost sharing and other restrictions (such as waiting periods and limitations on insurance coverage for part-time workers) have led to a growing number of uninsured workers employed by large firms.⁹

Some employers are reducing benefits by eliminating certain types of coverage. For example, retirees’ health insurance coverage has fallen significantly over the last few years.¹⁰

Employers do not appear to be dropping their health coverage entirely, at least not yet. A majority of employers indicate that they are exploring alternative insurance choices, although few have actually made a choice in the previous year. This may reflect dissatisfaction with the options available. Some of the innovations being considered for the next year include introducing tiered networks for doctor and hospital visits.¹¹

A greater understanding of employers’ responses to rising insurance premiums, as well as the effectiveness of their actions, is important because employer-sponsored health insurance is the foundation of insurance coverage in our society. A reduction in health insurance coverage would have a profound effect on public programs as well as the rates of uninsured.

AcademyHealth, in conjunction with technical expert Bryan Dowd of the University of Minnesota, has just embarked on a project to synthesize the research on employer responses to health care inflation. This project is funded by the Agency for Health Care Research and Quality and the HCFO program.

HCFO has funded a large body of research that directly informs these issues:

Title: Evaluation of Defined Contribution Plans on Health Insurance Choice and Medical Care Use
Grantee Institution: University of Minnesota
Principal Investigator: Stephen T. Parente, Ph.D.
Grant Period: November 1, 2002 – October 31, 2004

What are the effects of consumer-driven health plans? Researchers at the University of Minnesota are conducting a two-part evaluation of Definity Health, a consumer-driven plan. The researchers first are assessing the service use and adverse selection of consumers who select a CDHP. They also are assessing the experience of “early adopters” from the employer and employee perspective. The following research questions comprise the framework of the evaluation: 1) Who chooses to join CDHPs? 2) Do these plans attract the healthier employees in an employer’s health insurance risk pool? 3) How do cost and use differ among people in CDHPs versus other plans? 4) Do patterns of service use and medical care change for enrollees in CDHPs after enrollment? 5) How do employees and employers assess their experience in the plan? The objective of the study is to provide private and public decisionmakers unbiased information on the effects of CDHPs in their early stages.

Title: Evolution of Self-Insurance in an Era of Managed Care
Grantee Institution: Wayne State University
Principal Investigator: Gail A. Jensen, Ph.D.
Grant Period: August 1, 2000 – February 28, 2003

What is the relationship between increased state and federal managed care insurance regulations and employers’ decisions to self-insure their managed care offerings? The researchers at Wayne State University are testing the degree to which the decline in the percentage of employees who were offered self-insured managed care plans may be related to the passage of HIPAA and other federal mandates that could be applied to self-insured plans despite ERISA. In order to better understand the effects of federal and state policies on self-insured market between 1993 and 1999, the researchers are: 1) describing the evolution of self-insurance among large (over 200 workers) and smaller firms, including trends related to type of firm and type of health plan; 2) assessing whether there is a causal relationship between federal and state-level insurance regulations on employers’ self-insurance decisions, and on the type of self-insured plan chosen; and 3) comparing effects of state regulations pre- and post-1996 on self-insured and purchased plans, within the context of the 1996 federal reforms. Their objective is to inform policymakers about the interrelationships between self-insured employer plans, state and federal regulations, ERISA, and the market.

Title: The Transformation of Corporate Health Care Purchasing
Grantee Institution: JSI Research & Training Institute, Inc.
Principal Investigator: James Maxwell, Ph.D.
Grant Period: October 1, 1998 – May 31, 2001

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: Business Views of Strengths and Weaknesses of the Employer-Based System for Providing Health Insurance Coverage
Grantee Institution: Economic and Social Research Institute
Principal Investigator: Jack A. Meyer, Ph.D.
Grant Period: April 1, 2000 – June 30, 2001

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 were 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: Evaluation of the Buyers Health Care Action Group Initiative
Grantee Institution: University of Minnesota
Principal Investigator: Jon B. Christianson, Ph.D.
Grant Period: August 1, 1997 – July 31, 2000

How does direct purchasing of health care from physician groups, rather than relying on employers to purchase these services, affect consumer decision-making, utilization, and costs and quality of services received? Researchers at the University of Minnesota (with subcontractors at Johns Hopkins University) conducted a broad-based evaluation of the impacts of the Buyers Health Care Action Group Initiative in Minnesota. The Buyers Health Care Action group (BHCAG) contracts directly with non-overlapping groups of physicians called Competing Care Systems (CCS), which is offered to employees. BHCAG collected and disseminated extensive information on outcomes, quality and costs to employees, who could choose a Competing Care System directly (without relying on their employer to contract with the CCS). To assess the impact of the BHCAG initiative on health care organizations and the medical care system, researchers collected data through structured, in-person interviews with decision makers in CCSs continuously throughout the study period. They also collected written documents, when available. To assess the impact on consumer decisions, they conducted focus groups of BHCAG employees and also conducted interviews with BHCAG staff and employers. To assess the impact of the BHCAG initiative on health care delivery, they developed person-oriented analytical files from BHCAG claims data files and computerized enrollment files. The objective of the evaluation was to provide policymakers with information on how this experiment in direct purchasing of health care works, and to examine whether, and how, such a managed competition model could be implemented in other areas.

Title: Barriers to Small-Group Purchasing Coalitions
Grantee Institution: Economic and Social Research Institute
Principal Investigator: Jack A. Meyer, Ph.D.
Grant Period: August 1, 1998 – December 31, 1999

How might policy makers, consumers, small employers, and others identify and overcome barriers to the growth of health care purchasing coalitions? Researchers at the Economic and Social Research Institute, with a subcontract to Mark Hall, J.D., investigated why the growth of such coalitions has not been greater, given that the literature portrays consensus among analysts that coalitions are of value in the purchasing of coverage. The researchers identified and analyzed legal and policy constraints, structural and technical features, and political factors that might have slowed the adoption of coalitions. Ultimately, the objective of the study was to further understanding of the barriers to coalitions and formulate policy recommendations providing incentives to achieve the benefits predicted to and from coalition purchasing.

Title: Changes in Employer-Offered Health Insurance: Firms Decision Making & Employee Satisfaction
Grantee Institution: University of Pittsburgh
Principal Investigator: Judith R. Lave, Ph.D.
Grant Period: September 1, 1996 – August 31, 1999

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: Evaluating Business Initiatives in Health Care Purchasing
Grantee Institution: Economic and Social Research Institute
Principal Investigator: Jack A. Meyer, Ph.D.
Grant Period: April 1, 1995 – September 30, 1996

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.

¹ Towers Perrin. “Towers Perrin Projects Fifth Consecutive Year of Double-Digit Health Care Cost Increases in 2004,” September 29, 2003, www.towers.com.

² Office of Personnel Management. “OPM Director Kay Coles James Announces 2004 Federal Employees Health Benefits Program Premiums,” September 16, 2003, www.opm.gov.

⁴ Kaiser Family Foundation and Health Research and Educational Trust, “Employer Health Benefits, 2003 Summary of Findings,” Pub No 3370, www.kff.org.

⁵ ibid.

⁶ Ginsburg, P.B. and L.M. Nichols, “The Health Care Cost-Coverage Conundrum,” Annual Essay 2002-3, Center for Studying Health System Change, Fall 2003, www.hschange.org.

⁷ Christianson, J.B. and S. Trude. “Managing Costs, Managing Benefits: Employer Decisions in Local Health Care Markets,” Health Services Research, Vol. 38, No. 1, Part II, Feb 2003, pp. 357-73.

⁸ Kaiser Family Foundation and Health Research and Education Trust. “Employer Health Benefits: 2003 Summary of Findings,” Pub No. 3370, www.kff.org.

⁹ Glied, S. et al. “The Growing Share of Uninsured Workers Employed by Large Firms,” The Commonwealth Fund, Pub. No. 672, October 2003, www.cmwf.org.

¹⁰ Kaiser Family Foundation and Health Research and Education Trust. “Employer Health Benefits: 2003 Summary of Findings,” Pub. No. 3370, www.kff.org, and Stuart, B. et al. “Employer-Sponsored Health Insurance and Prescription Drug Coverage for New Retirees: Dramatic Declines in Five Years,” Health Affairs Web exclusive, July 23, 2003, www.healthaffairs.org.

¹¹ Kaiser Family Foundation and Health Research and Education Trust. “Employer Health Benefits: 2003 Summary of Findings,” Pub. No. 3370, www.kff.org.