1 Recently, the cost of providing health

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1 Perspectives on Health Reform and Its Implementation Paul Fronstin Employment-Based Health Benefits: Recent Trends and Future Outlook The employment-based health benefits system established its roots many years ago. It was during World War II that many more employers began to offer health benefits. Recently, however, both the percentage of workers with employment-based health benefits and the comprehensiveness of such coverage have been declining. This paper examines recent trends in employment-based health benefits. It also considers the likely future of this important workplace benefit in light of shifts from defined benefit to defined contribution models of employee benefits and with regard to the implementation of health reform. The employment-based health benefits system established its roots many years ago. Early examples of employment-based health programs include the mining, lumbering, and railroad industries during the late 1800s (Institute of Medicine 1993). Employers in these industries provided company doctors funded by deductions from workers wages. Employers had a practical interest in providing health services to injured or ill workers, who often worked in remote geographic regions. It was during World War II that many more employers began to offer health benefits. Because the National War Labor Board (NWLB) froze wages, employers sought ways to get around the wage controls to attract scarce workers. In 1943, the NWLB ruled that employer contributions to insurance did not count as wages, and thus did not increase taxable income, and were not subject to the wage freeze. As a result, health insurance became an attractive means to recruit and retain workers. Growth in employment-based health benefits accelerated during and after World War II, and by the end of the war, health insurance coverage in the United States had tripled (Weir, Orloff, and Skopol 1988). Since the end of World War II, employer spending on health benefits as a percentage of total compensation has increased. By September 2011, health insurance reached 8.4% overall as a percentage of total compensation, and it is higher for employers that offer coverage. 1 Recently, the cost of providing health benefits has been rising faster than overall inflation and increases in worker earnings (Figure 1). Despite recent high unemployment, employers continue to offer health benefits on a voluntary basis to be competitive in the labor market. They also offer health benefits in order to provide workers and their families with protection from financial losses that can accompany unexpected serious illness or injury, to promote health, and to increase worker productivity. Employers have a motivation to provide health benefits as a means of protecting their investment in employees. The cost of Paul Fronstin, Ph.D., is director of the Health Research and Education Program at the Employee Benefit Research Institute. Address correspondence to Dr. Fronstin at Employee Benefit Research Institute, th St., NW, Suite 878, Washington, DC Fronstin@ebri.org Inquiry 49: (Summer 2012) Excellus Health Plan, Inc. ISSN /inquiryjrnl_

2 Inquiry/Volume 49, Summer 2012 Figure 1. Premium increases among employers with 10 or more employees, worker earnings and inflation, (Source: Mercer and Bureau of Labor Statistics) absenteeism and presenteeism (attending work while sick) related to health status reduces human capital productivity and can trigger other expenses, such as sick pay and disability costs. In addition, employers have been able to provide group coverage at much lower cost than many individuals would be required to pay in the individual market, if they could get health insurance at all in the individual market. Employers could have changed health benefits much like they did with defined benefit pension plans, but they have not. A major reason for continuing to maintain the benefit is that employers have been concerned about the lack of a viable alternative to employment-based health benefits. This may change if employers view publicly sponsored and private health insurance exchanges as a viable alternative to traditional employment-based health benefits. This paper examines recent trends in employment-based health benefits. It also considers the likely future of this important workplace benefit in light of shifts from defined benefit to defined contribution models of employee benefits and with regard to the implementation of health reform. The next section examines trends in coverage. Trends in cost-sharing are then examined, followed by plan funding and consumer-directed health plans. The paper ends with a discussion of the role that private health insurance exchanges may play in the future of employment-based health benefits. Recent Trends in Employment-Based Coverage There have been numerous references to the death of employment-based health benefits. Here is how the employment-based system of providing health benefits has been described: vanishing ; 2 failing ; 3 [employers] are fleeing the system ; 4 employer-based health care is ending. It is dying in front of our very eyes ; 5 employer-based health coverage is melting away like a popsicle on the summer sidewalk. 6 Furthermore, some organizations and policymakers have promoted policies that effectively would end employment-based health benefits as we know them (Fronstin and Salisbury 2007), and it can be argued that the Patient Protection and Affordable Care Act (ACA) will impact the future of employment-based health benefits. 7 Despite the continued rising cost of providing health benefits to workers relative to workers earnings and overall inflation, an examination of recent history suggests that, 102

3 Employment-Based Health Benefits Figure 2. Percentage of firms offering health benefits, (Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, ) for the most part, the availability of employment-based health benefits among large employers has been stable; there has been some erosion in the availability through smaller employers; there has been erosion in the percentage of workers with coverage; and cost-sharing has been increasing. At the same time, out-of-pocket payments as a share of total health care spending are at an all-time low, and the portion of the premium paid by workers remains unchanged since the early 1990s. In what follows, I document trends in some key measures of the availability of, and enrollment into employment-based coverage, and also describe changes in the types of health plans available at the workplace. Employer Offer Rates Between 2001 and 2005, the percentage of employers offering coverage fell from 68% to 60% (Figure 2). However, since 2005, the percentage of employers offering coverage has been steady (other than what might be a statistical anomaly in 2010). Worker Coverage Rates Since 2000, the percentage of workers with employment-based health coverage has been falling. In 2010, 68.6% of workers had employment-based health benefits, down from 75.9% in 2000 (Figure 3). Despite the fact that the percentage of employers offering health coverage has been relatively steady since 2005, the percentage of workers with coverage has fallen in most years since The decline in coverage has occurred among workers getting coverage from their own jobs (own name coverage) and among those getting coverage as dependents. Just over onehalf (51.5%) of workers had coverage through their own jobs in 2010, down from 54.2% as recently as And the percentage of workers with coverage as dependents fell from about 20% in 2000 to 17.1% in Structural Changes in the Economy and the Decline in Coverage If the decline in coverage cannot be attributed to fewer employers offering coverage, then either fewer workers are taking coverage when it is offered or structural changes in the economy are affecting whether workers are eligible for coverage. Past research has found that structural changes to the economy can impact the percentage of workers with coverage. Acs (1995) and Long and Rodgers (1995) found 103

4 Inquiry/Volume 49, Summer 2012 Figure 3. Percentage of workers, ages 18 64, with employment-based health benefits and without health insurance, (Source: Fronstin 2011) that changes in industry composition accounted for some of the decline in coverage among workers in the 1980s and 1990s. Fronstin and Snider (1996/97) found that besides declines in manufacturing, the increased use of part-time workers and the decline in unionization also contributed to the erosion in coverage. There is no reason not to believe that recent structural changes to the economy have contributed to the continuing decline in coverage as well. Between 2007 and 2010, the percentage of workers employed part time increased from 17% to 20% (Fronstin 2011a), union membership declined slightly from above 12% to below 12%, 8 and manufacturing jobs as a percentage of the workforce has fallen from 17.8% of the work force to 16.4%. 9 Take-Up Rates Declining Take-up rates among workers eligible for coverage through their own jobs remain high but they have declined. In 2010, 83.6% of workers eligible for coverage took it, down from 85.1% in 2005 (Fronstin 2012). Among those workers declining coverage, the percentage uninsured increased from 19.5% in 2005 to 24.8% in 2010, and about threequarters of those who are uninsured report that they decline coverage because the plan is too costly. However, among those offered coverage through their own jobs, most decline it because they get coverage through a family member. As a result, less than 5% of the population eligible for employment-based coverage through their own jobs were uninsured in Premium increases can cause fewer workers to take coverage when it is available and workers have been paying more for health coverage through payroll deduction relative to income. Between 1999 and 2011, worker premiums for employee-only coverage increased from $27 to $77 per month, a 185% increase, and family coverage premiums increased from $129 to $344 per month, a 167% increase. 10 In contrast, the consumer price index (CPI) increased by 34%, while worker earnings increased by about 43%. For the most part, however, the worker share of the premium has not been increasing. In 2011, workers paid an average of 18% of the cost of coverage for employee-only coverage, compared to 16% in Between 2002 and 2011, the percentage of the premium paid by workers for family coverage has been bouncing between 26% and 30%. 104

5 Employment-Based Health Benefits Recent Trends in Cost-Sharing Worker cost-sharing for health care services has been increasing. Between 2005 and 2011, the average annual deductible among workers with employee-only coverage in a preferred provider organization (PPO) increased from $469 to $1,202 among those employed in a firm with three to 199 workers, a 156% increase. 12 It rose from $254 to $505 for family coverage, about a 100% increase. In contrast, worker earnings grew 20% since Copayments for office visits have been increasing as well. Between 2006 and 2011, the percentage of workers with a copayment of $20 or more for their primary care physicians increased from 50% to 77%. 13 Similarly, the percentage of workers with a copayment of $30 or more for a physician specialist increased from 28% to 54%. 14 Copayments also have risen for certain prescription drugs. For example, between 2000 and 2011, the average copayment for brand name (preferred) drugs on a plan s formulary increased from $15 to $29, while the average copayment for nonformulary (nonpreferred) brand name drugs increased from $29 to $ The copayment for generic drugs was roughly $10 throughout this period, suggesting that plan sponsors are not only increasing cost-sharing but are making the differences between the various cost-sharing levels larger to more effectively engage workers in decisions regarding the use of health care services. While coinsurance rates have not risen for generic or preferred drugs on the formulary, coinsurance for nonpreferred drugs rose from 28% in 2000 to 39% in However, among workers with the same type of costsharing regardless of the type of drug chosen, the percentage with coinsurance has been increasing and the percentage with copayments has been decreasing. Between 2007 and 2011, the percentage of workers with coinsurance for prescription drugs increased from 43% to 71%. 16 Despite the fact that cost-sharing has been increasing, on a national level, the percentage of consumer health care expenses paid out of pocket is at an all-time low. In the 1970s, 30% to 40% of personal health care expenses were paid out of pocket. 17 By 2009, out-of-pocket spending as a percentage of total personal spending was down to 14%. Plan Funding Trends Self-insurance has been growing over the years. Overall, the percentage of workers in self-insured plans increased from 44% in 1999 to 60% in Self-insured arrangements are not only much more prevalent in large firms, but all of the growth in its prevalence has occurred among large employers. Among employers with three to 199 workers, the percentage of workers in self-insured plans bounced between 10% and 17% from 1999 to 2011 with no clear trend. Similarly, among employers with 200 to 999 workers, the percentage of workers in self-insured plans varied between 47% and 53%, with the 58% estimate in 2010 appearing to be an outlier. Employers with 1,000 to 4,999 workers saw the percentage in self-insured plans increase from 62% to 79% between 1999 and 2011, and among employers with 5,000 or more employees, 96% of workers were covered by self-insured plans in 2011, up from 62% in The prevalence of self-insurance in large employers is due to a variety of factors. First, it is easier for larger employers to employ the staff necessary to administer self-insured plans and, second, it is easier for them to bring together the financial resources to pay claims. In addition, self-insurance allows plan sponsors to design benefit packages to fit the needs of their workforces. When a plan selfinsures, it can spell out which services it will cover, make arrangements with doctors and hospitals to provide coverage at favorably negotiated rates, and design financial incentives, such as deductible and copayment structures, that encourage wise use of health benefits. The ability to do all of this via selfinsurance can give large employers a distinct and significant cost advantage over firms opting to purchase insurance. Even for those small firms able to pay for health insurance, many simply cannot afford the potential liability that can arise when a complex and costly illness strikes a covered employee or dependent meaning these firms cannot afford to take on the risk 105

6 Inquiry/Volume 49, Summer 2012 of self-insuring. Purchasing stop-loss insurance can mitigate this risk, but even this action requires administrative acumen and overhead that is often lacking in small firms. A more fundamental problem for small firms is the cost of health insurance coverage generally. Many small firms simply find it difficult, if not impossible, to afford to provide coverage for their employees. Consumer-Directed Health Plans In 2001, a handful of employers started offering health reimbursement arrangements (HRAs) at the time a new type of health plan known as a consumer-directed health plan (CDHP). A health reimbursement arrangement is an employer-funded health plan that reimburses employees for qualified medical expenses. HRAs typically are combined with a high-deductible health plan, though this is not required. HRAs also can be offered on a stand-alone basis or with comprehensive insurance that does not use a high deductible. Employees are eligible for an HRA only when their employer offers such a health plan. These plans were offered by self-insured employers and administered by a third party. 19 HRAs were provided under then-existing tax law; however, because of the newness of their plan design and the potential legalities, employers were generally hesitant to offer HRAs until release of the Internal Revenue Service (IRS) Revenue Ruling and Notice , which provided guidance clarifying the general tax treatment of HRAs, the benefits offered under an HRA, the interaction between HRAs, cafeteria plans, and flexible spending accounts (FSAs), and other matters under current law. 20 It can be argued that HRAs paved the way for health savings accounts (HSAs) or HSAeligible plans, another type of CDHP. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 included a provision to allow individuals with certain high-deductible health plans to contribute to an HSA. An HSA is a tax-exempt trust or custodial account that an individual can use to pay for health care expenses. Worker contributions to the account are deductible from taxable income, employer contributions (if there are any) are excluded from taxable income, investment income builds up tax free, and distributions for qualified medical expenses are not counted as taxable income. In 2012, the maximum annual contribution is $3,100 for self-only coverage, and $6,250 for family coverage. To qualify for tax-free contributions to an HSA, an individual must be covered by a health plan that in 2012 has an annual deductible of no less than $1,200 for self-only coverage and $2,400 for family coverage (minimum deductible amounts are indexed to inflation). There are also statutory out-of-pocket maximums and certain preventive services can be exempt from the deductible. There is no use-it-or-lose-it rule associated with HSAs, since any money left in the account at the end of the year automatically rolls over and is available in the following year. These plans are known as HSA-eligible plans because not all people eligible to contribute to an HSA, in fact, have such an account or contribute to one. Advocates of HRAs and HSA-eligible plans claimed that these options simultaneously provided consumers with broader choices than were currently available, while the consumers aggregate decisions would cap costs more effectively than top-down, conventionally managed care plans had done. But some analysts warned that consumers lacked the discipline and sophistication to successfully navigate an increasingly complex health care system and understand what care was truly necessary. They saw the initiative as an opportunity for employers to transfer a growing portion of rising costs to employees (Jaffe 2002). Initially, projections for growth in HRAs and HSA-eligible plans were strong. A 2002 survey found that 44% of large employers were expected to offer an HRA by A 2004 survey of mostly large employers found that more than two-fifths of respondents reported that they were either very likely (8%) or somewhat likely (35%) to offer an HSAeligible plan in 2005 (Mercer 2004). The same survey found that 19% were very likely and 54% were somewhat likely to offer such a plan in Another survey conducted at about the same time found that 61% of large employers were likely to offer an HSA in the near future

7 Employment-Based Health Benefits Predictions for strong growth in CDHPs continued. In 2005, the U.S. Treasury Department predicted that 25 million to 30 million people would be covered by an HSAeligible plan and would have an account by Similarly, in 2005, Forrester Research predicted that CDHP enrollment could account for 19% of the market in 2009 and 24% by 2010 (or about 42 million people). 24 CDHP Offer Rates There are many surveys that track the percentage of employers offering a CDHP either as the only health coverage option or as one among other options. Annual surveys by the Kaiser Family Foundation (KFF) 25 and by Mercer 26 are perhaps the two most wellknown. Both surveys are nationally representative. The KFF survey examines offer rates for employers with three to 199 employees, 200 to 999 employees, and 1,000 or more employees. Mercer does not collect data for the smallest employers (those with fewer than 10 workers), but has detailed data on employers by the following worker sizes: 10 to 499, 500 to 999, 1,000 to 4,999, 5,000 to 9,999, 10,000 to 19,999, and 20,000 or more. Other surveys tend to be more focused on a specific slice of the employer market, such as the large-group or small-group market, or are based on relatively small sample sizes. Since the introduction of CDHPs in 2001, the percentage of employers offering them has grown. Both the KFF and the Mercer surveys show that the percentage of employers offering an HRA- or HSA-eligible plan increased from below 5% in 2005 to over 20% by Growth in offer rates can be seen across all firm sizes. Among small firms, those with three to 199 workers, the percentage offering a CDHP increased from 4% in 2005 to 23% in Among mid-size firms, those with 500 to 999 workers, the percentage offering a CDHP option increased from 4% in 2005 to 18% in And among the largest, or jumbo firms, 22% were already offering a CDHP option by 2005, increasing to 51% by When it comes to the type of CDHP offered, by 2011, employers were more likely to offer an HSA than an HRA across all firm sizes. Overall, 7% of employers offered an HRA while 18% offered an HSA. 27 However, because large firms are much more likely than small firms to offer an HRA, enrollment in the two types is about equal. In 2011, 8% of workers were enrolled in an HRA and 9% were enrolled in an HSA. 28 CDHP Enrollment According to data from the 2011 Employee Benefit Research Institute (EBRI)/Mathew Greenwald & Associates (MGA) Consumer Engagement in Health Care Survey, 7% of the adult population with private health insurance was enrolled in a CDHP and enrollment in high-deductible health plans (HDHP) was 16% (Fronstin 2011b). The 7% of the population with a CDHP represents 8.4 million adults ages 21 to 64 with private insurance, while the 16% with an HDHP represents 19.3 million people. Among the 19.3 million individuals with an HDHP, 38% (or 7.3 million) reported that they were eligible for an HSA but did not have such an account. Thus, overall, 15.8 million adults ages 21 to 64 with private insurance, representing 13.1% of that market, were either in a CDHP or in an HDHP that was eligible for an HSA, but they had not opened the account. When their children are counted, about 21 million individuals with private insurance, representing about 12% of the market, were either in a CDHP or an HSA-eligible plan. CDHP Premiums Figure 4 shows premiums for employee-only coverage for HRAs, HSAs, and non-cdhps from 2005 to 2011 using data from the Kaiser Family Foundation annual employer survey. Generally, premiums for CDHPs were lower than premiums for non-cdhps in all years except 2005, when premiums for HRA plans were higher than premiums for non- CDHPs. By 2011, annual premiums averaged $5,227 for HRA-based plans, $5,038 for HSAeligible plans, and $5,565 for non-cdhp plans. Note that the premium for HSA-eligible plans includes employer contributions to the HSA. Growth in premiums has varied both by type of plan and over time. Premium changes for non-cdhps and HSA-eligible plans have tracked closely, with the non-cdhp premiums increasing faster than HSA-eligible 107

8 Inquiry/Volume 49, Summer 2012 Figure 4. Average annual premiums, employee-only coverage, by plan type, (Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, ) premiums about one-half the time, and HSAeligible premiums increasing faster than non- CDHP premiums the other half of the time. Premiums for HRA plans have not shown any type of trend, with double digit increases in 2008, 2010, and 2011, and negative increases in 2006 and Using data from the Kaiser study to track trends in premiums does not control for other factors that also might be affecting premiums. CDHP premiums may be lower than non- CDHP premiums simply because the CDHP population is healthier. There is some evidence of this, and it is discussed in the next section. Furthermore, if the population leaving non-cdhps for CDHPs is healthier and uses less health care than the population remaining in a non-cdhp, comparing premiums in the Kaiser study will not necessarily reflect what an employer may see if it moves from a non-cdhp to either an HRA-based plan or HSA-eligible plan. The experience that an employer sees also will depend on whether the employer offers the CDHP options alongside non-cdhp options, or if it moves to a full-replacement model, where the CDHP is the only option offered. A number of independent studies have tried to explain the differences in premiums between CDHPs and non-cdhps. As an example, actuaries at the consulting firm Milliman studied six employers with roughly 225,000 workers, 30,000 of whom were enrolled in a CDHP (Burke and Pipich 2008). The study found that actual premium savings from CDHPs ranged from a high of 15.5% to a low of -4.7%. Average savings was 4.8%. However, the study found that most of the savings was due to the fact that younger, healthier workers chose CDHPs; it concluded that once typical risk- and benefit-adjustment factors were taken into account, CDHPs saved only 1.5%. CDHP Impact on Use of Services There is a limited but growing peer-reviewed literature on the impact of CDHPs on cost, use, and quality. For the most part, the studies are still relatively limited, and substantially confined to point-in-time descriptions of varied factors in pre/post comparisons immediately following the introduction of these constructs. Much of the initial research focused solely on HRAs, though research on HSA-eligible plans is starting to emerge. The literature on use of health care services mostly falls into two types: those focusing on the impact of CDHPs on the use of preventive and screening services, and those focusing on the use of 108

9 Employment-Based Health Benefits prescription drugs. Studies also have examined the impact on general use of inpatient, outpatient, and emergency care. The literature is mixed when it comes to the impact of CDHPs on preventive and screening services. One study examined four employers that adopted a full-replacement CDHP (Parente, Feldman, and Xu 2010). The study examined the impact of moving to a CDHP on office visits for preventive care, use of colonoscopy, screenings for cervical cancer, and mammography. It found that for each measure, at least one firm saw a decrease in prevention or screening. However, these declines were never seen across all four firms, and none of the firms experienced a reduction in all preventive and screening measures. The decreases found occurred despite the fact that these services were covered 100% by all four employers in the study. Other studies have found similar levels in the use of preventive, cancer screening, and diabetic monitoring services between CDHP and PPO enrollees over the three-year period (Rowe et al. 2008), moderate reductions in the use of preventive services (Buntin et al. 2011), fewer office visits, fewer emergency department visits, reduced breast cancer screening, reduced cervical cancer screening (Charlton et al. 2011), and reductions in inpatient care and visits to specialists (Haviland et al. 2011). There are also mixed findings with respect to the impact of CDHPs on prescription drug use. One study examined a large self-insured employer that added an HRA in 2001 to see whether there were differences in the use of prescription drugs between HRA enrollees and individuals with a three-tier cost-sharing structure. The researchers found that CDHP enrollees continued to use brand names and fewer generic drugs in the second year of the program; however, the generic drug use reductions did not persist. Moreover, CDHP enrollees with chronic conditions did not use more drugs than those in other plan designs (Parente, Feldman, and Chen 2008). Another study examined an employer that offered two HRA-based plans and a traditional plan in It focused on people using prescription drugs for asthma, dyslipidemia, depression, hypertension, and ulcers before the availability of the HRA and then examined prescription drug use after enrollment in the CDHP. It found that use of prescription drugs to treat hypertension and high cholesterol fell, whereas there was no change for asthma, depression, or ulcer medications. The study found that 17% of the higher-deductible CDHP enrollees taking medication to treat hypertension in late 2003 were no longer taking pharmacotherapy in Among individuals who continued to take medications after moving to a CDHP, there was no observed reduction in adherence (Greene et al. 2008). A third study examined adherence to maintenance drugs using 33 employers who adopted a full-replacement CDHP in Data from 2005 and 2006 were used and were compared with enrollee experience from 47 employers with traditional coverage. The study attempted to limit the analysis to people with asthma, cardiac, diabetes, epilepsy, hypertension, high cholesterol, rheumatoid arthritis, and thyroid conditions. The investigators found that utilization of prescription drugs decreased in both types of plans, but declined more for the CDHP population. 29 Specifically, after enrolling in the CDHP, individuals were less likely to refill drugs for cardiac conditions and high cholesterol. CDHP members also had poorer drug compliance and persistence for asthma, cardiac conditions, and high cholesterol the authors greatest concern. Adherence was consistently and significantly lower for CDHP patients by all measures (Chen, Levin, and Gartner 2010). Most recently, a study found that a CDHP resulted in reductions in the use of non-generic prescription drugs (Haviland et al. 2011). Interest in Private Exchanges and Fixed Contributions Interest in private health insurance exchanges combined with a fixed-dollar contribution from employers made a resurgence even before the 2010 passage of the ACA. In May 2007, the ERISA Industry Committee (ERIC), a membership organization representing the employee benefit plans of the largest corporations in the United States, released its position paper, A New Benefit Platform for Life Security. 30 In it, 109

10 Inquiry/Volume 49, Summer 2012 ERIC outlines a proposed structure that employers could use as an alternative to the current way they provide both health and retirement benefits. The proposal used an exchange ( benefit administrator ) combined with a fixed contribution from participating employers. The structure as outlined provides for portability of health insurance within the exchange and permits individuals and small businesses to buy into a much larger pooling arrangement than exists today. The benefit administrator would take on most, if not all, of the administrative responsibilities now borne by employers, who would pay for benefits chosen by their employees through the fixed contribution mentioned previously. Employers would continue to be responsible for due diligence and monitoring of the benefits offered by competing benefits administrators. In these ways, the health insurance exchange bears some resemblance to the concept of managed competition developed by Enthoven and others (Enthoven 1993). In October 2007, the Committee for Economic Development (CED), an organization of business leaders and educators, released its recommendations for replacing employmentbased health benefits with a system of independent regional exchanges from which individuals, who would be given a fixed contribution from their employers, could purchase health insurance from among competing private health plans. 31 The exchanges would set standards for the insurers and each year conduct an open enrollment season when individuals could change health plans. The exchanges would manage risk adjustments for insurers, but no one could be denied coverage because of age or prior illness. At some point after the exchanges were established, every family would receive a fixed-dollar tax credit, sufficient to pay the premium on the basic, low-cost plan in its region, so the family could be insured without incurring any cost. Any higher-cost policy would be paid by individuals with after-tax dollars. The current tax preference for employment-based health coverage would be eliminated in order to finance the fixed-dollar tax credit. Since the release of these positions and passage of the ACA, interest in private exchanges and fixed-dollar contributions models for active workers and/or retirees has continued. In June 2011, Mercer found that 38% of employers were interested in some type of defined contribution model (Mercer 2011). About one-quarter of employers surveyed were interested in providing a fixed contribution for the plans that the employer offered so employees would pay more if they chose more expensive coverage, and 9% were interested in providing employees with a fixed-dollar subsidy to purchase coverage on their own. The consulting firm Towers Watson found that 5% of employers were very confident and 25% were somewhat confident that health insurance exchanges would provide a viable alternative to employment-based health benefits for active workers in 2014 or 2015 (Towers Watson 2011). It also found that 16% of employers were very confident and 37% somewhat confident that health insurance exchanges would provide a viable alternative to employment-based health benefits for early retirees. The survey also found that 12% of employers were very likely and 9% were somewhat likely to replace their health plan for active workers employed 30 or more hours per week with a financial subsidy. The HR Policy Association perhaps found the strongest interest in heading toward a defined contribution (DC) approach over the next decade when it surveyed chief human resource officers. The survey found that 36% of respondents were giving serious consideration to moving to a DC strategy for active workers. 32 In fact, some employers already report moving toward a fixed-contribution model for retiree coverage. The International Foundation of Employee Benefit Plans (IFEBP) found that 2.6% of employers adopted such an approach, and 4.4% were adopting it in 2011 (Natchek, Held and Mrkvicka 2011). Some employers view the ACA as an opportunity to cease providing health benefits. Benefits consultant Lockton found that 16% of its employer client companies reported that one of the most beneficial potential benefits of the ACA was the option to terminate coverage because employees will have other options (Lockton Companies, LLC 2011). It therefore should come as no surprise that confidence levels have been falling among 110

11 Employment-Based Health Benefits Figure 5. Employers confidence that health care benefits will be offered at their organization a decade from now, (Source: 17th Annual Towers Watson/ National Business Group on Health Employer Survey on Purchasing Value in Health Care 2012) employers when they are asked whether health benefits will be offered in the workplace a decade from now. Between 2007 and 2011, the percentage of employers reporting that they were highly confident that they would be offering health benefits a decade later fell from 70% to 23% (Figure 5) a sharp contrast with the confidence of workers in employmentbased coverage programs cited earlier. While surveys of employers should not be used to predict their behavior two or three years from now, collectively they show that a significant number of employers are interested in the insurance exchanges and the concept of a defined contribution and may continue to show interest as long as they are examining ways to manage the cost of providing health coverage. As a result of such interest, a number of private exchanges are currently in development. 33 Most recently, Aon Hewitt, one of the developers of a private exchange, reported that 44% of employers interviewed for a recent survey believe a private health insurance exchange will be the preferred approach to offering health care benefits to workers in three to five years. 34 Historical changes to defined benefit pension plans and retiree health benefits may be precedents for changes that employers make to health benefits for active workers. Defined Benefit Pension Plans The movement from defined benefit (DB) pension plans to defined contribution retirement plans offers insights into how employers fundamentally redesigned a benefit. In 2010, 7% of private sector workers with a retirement benefit were participating in only a DB plan, down from nearly 62% in In contrast, the percentage of private sector workers with a retirement plan participating in only a DC plan increased from 16% to 69%. The percentage with both a DB and DC plan was 22% in 1979 and 24% in 2010, and peaked at 35% in the mid-1980s. Furthermore, even among workers with a DB, many of those benefits have been frozen a term used to describe a limit on some or all future accrual of benefits under the plan. In 2008, the U.S. Government Accountability Office (GAO) reported that about one-half of all DB sponsors had frozen one or more of their DB plans (U.S. GAO 2008). Overall, 21% of all active participants in a single-employer DB plan were affected by such a freeze. 111

12 Inquiry/Volume 49, Summer 2012 DB plans steadily lost ground as the preferred plan type for a number of reasons. First, government regulation has had a profound impact on plan choice (Clark and Schieber 2000; Ippolito 2002; VanDerhei and Copeland 2001). Second, changes in the workplace may have contributed to the rise of DC plans, including the increased employee and employer appreciation and demand for DC plans (Gale, Papke, and VanDerhei 1999; Ostaszewski 2001). Third, a number of economic explanations have been proposed as well (Brown and Liu 2001; Ostaszewski 2001; Salisbury 1997; VanDerhei and Copeland 2001), including the business environment and the risk associated with funding and managing pension plans, issues with firm size, and the increase in global competition faced by employers in recent years, which has led to the subsequent need for more flexibility in plan design. While employers did not set out to shift the cost of retirement planning onto workers, an end result was that all of the investment risks and all or most of the administrative costs were transferred to workers in a DC retirement plan, whereas under most private sector DB pensions, employers had assumed all of those costs. In short, those DC retirement plans have allowed employers to exercise more control and predictability over most or all of the costs associated with providing retirement benefits to employees (Nichols 2002), which may be why employers were interested in the same concept for health benefits a decade ago (Fronstin 2001). Retiree Health Benefits One of the most important factors (if not the single most important factor) that has impacted the way employers have provided retiree health benefits was a 1990 rule change issued by the Financial Accounting Standards Board (FASB) requiring employers to report their retiree health liabilities. The approval of Financial Accounting Statement No. 106 (FAS 106), Employer s Accounting for Postretirement Benefits Other Than Pensions, in December 1990 triggered many of the changes that private sector employers have made to retiree health benefits since the early 1990s. FAS 106 requires companies to record retiree health benefit liabilities on their financial statements in accordance with generally accepted accounting principles. The immediate income statement inclusion and balance sheet footnote recognition of these liabilities dramatically affected a company s reported profits and losses. The impact was greatest on large employers, since smaller ones were much less likely to offer retiree health benefits. With a new view of the cost, and increasing cost, of providing retiree health benefits, many private sector employers overhauled their retiree health programs in ways that controlled, reduced, or eliminated these costs. FAS 106 and the rising cost of providing retiree health benefits resulted in fewer employers offering retiree health benefit. Between 1993 and 2011, the percentage of employers with 500 or more employees offering retiree benefits fell from 46% to 24% (Figure 6). While large establishments were more likely to offer retiree health benefits than small establishments, the percentage offering retiree health benefits among private establishments with 1,000 or more employees fell from 53% to 34% between 1997 and Among employers continuing to offer retiree health benefits, many have simply made the cost of coverage more expensive for retirees. Many employers have either set some type of defined contribution in the form of caps, or a ceiling that limited their cost, or they chose not to subsidize the cost of retiree health coverage at all. According to Aon Hewitt, 24% of employers offering health benefits to early retirees have adopted a defined dollar approach that limits the employer s cost. Another 50% require the retiree to pay the full cost of the benefit and another 25% have no defined dollar cap to the employer subsidy. In fact, the percentage of employers with a defined dollar approach has fallen from 31% in 2005 only because the percentage of employers requiring retirees to pay the full cost has increased. Regardless of the reasons for moving to defined or fixed contributions for retirement and retiree health benefits, employers are better able to predict their costs associated with these programs. Employer experience with these historical precedents may also explain 112

13 Employment-Based Health Benefits Figure 6. Percentage of employers offering health coverage to early retirees, by firm size, (Source: Mercer and Medical Expenditure Panel Survey) why there is a renewed interest in the concept of a defined contribution approach for health benefits. Conclusion Despite the fact that since 2005 the percentage of employers offering health benefits has been unchanged, fewer workers have health coverage through the workplace. While employers continue to offer health coverage to workers, there has been an across-the-board increase in cost-sharing and a movement to consumer-directed health plans. Surveys of employers collectively show that a significant number are interested in the concept of defined-contribution health benefits and that private health insurance exchanges may be the vehicle for the delivery of such benefits a concept that garnered much attention about a decade ago and is showing renewed interest because of the combination of insurance market reforms and the embodiment of the exchange structure in the ACA. Ultimately, we may be on the cusp of a fundamental change in the way employers provide health coverage to workers. Notes pdf /business_healthcare.html 3 quality_affordable_health_care_for_all_moving_ beyond_the_employer_based_health_insurance_ system_executive_summary. 4 See page 11 in events/ pdf. 5 See page 12 in events/ pdf. 6 See 7 Also see Cannon (2005), Goodman (2002), and Tanner (1999). 8 %20Salary%20Workers.xls. 9 Author estimates from the March supplement to the Current Population Survey. 10 See 21&ch See 21&ch See various years. 13 Calculated from Exhibit 7.24 in kff.org/pdf/2011/8225-section_7.pdf. 14 Calculated from Exhibit 7.25 in kff.org/pdf/2011/8225-section_7.pdf. 113

14 Inquiry/Volume 49, Summer See Exhibit 9.4 in Section_9.pdf. 16 See various years. 17 Calculated from data in NationalHealthExpendData/downloads/nhe 2010.zip. 18 See Exhibit 1 in Section_10.pdf. 19 Definity Health and Lumenos were the most well-known third-party administrators of HRAs. Early adopters of Definity Health included Aon, Budget, Charter Communications, CompFirst, Countrywide, CVS Pharmacy, Dade Behring, Hannaford Brothers, Louisiana State University, Medtronic, PWPipe, Raytheon, Ridgeview Medical Center, Scientific Atlanta, Supervalu, Textron, University of Minnesota, WelchAllyn, Wise Business Forms, and Woodward. Early adopters of Lumenos included Abbott Laboratories, CIBA Vision, Federated Department Stores, Gerber, Macy s, Novartis, Pharmacia, Pitney Bowes, Radnor Holdings, StyroChem, and WinCup. Definity Health was acquired by UnitedHealthcare in 2004, and Lumenos was acquired by Wellpoint in The Ruling and Notice were published in Internal Revenue Bulletin ( ), dated July 15, 2002, and can be found at com/irs/revrul pdf and gov/pub/irs-drop/n pdf. 21 Presentation by B. J. Holmes, Winning in the Consumer Directed Health Plan Market, Forrester Research, Forrester s 2002 Benefits and Technology Survey. 22 See See hsa-fact-sheet-dramatic-growth.pdf. 24 See Inside Consumer-Directed Care (Nov. 4, 2005). 25 See 26 See 27 See Exhibit 8.1 in Section_8.pdf. 28 See Exhibit 8.4 in Section_8.pdf. 29 This raises a side question as to why utilization would drop in the traditional plan, which was not addressed in the paper. 30 See filename.ERIC_New_Benefit_Platform_ FL06060.pdf. This proposal also provides for a retirementplanforallworkersandcallsforsubsidies for low-income workers who cannot afford to save for retirement. 31 See health_care/report_healthcare07.pdf. 32 See CHRO%20Report%20Draft_FINAL%20REORD ERED_HC%20Only.pdf. 33 See siness/ small-business-insurance_n.htm, a/bloom-health-launches-two-private-health- Exchanges.htm, 11/08/health-insurer-trio-launches-cost-savingdefined-contribution-program/#.TrrnmGtSPbs. twitter, companies/walgreens_health_insurance/index. htm?iid5hp_ln, nhpw See Report_Final_2.pdf. References Acs, G Explaining Trends in Health Insurance Coverage Between 1988 and Inquiry 32(1): Brown, R. L., and J. Liu The Shift to Defined Contribution Plans: Why It Did Not Happen in Canada. North American Actuarial Journal 5(3): Buntin, M. B., A. M. Haviland, R. McDevitt, and N. Sood Healthcare Spending and Preventive Care in High-Deductible and Consumer-Directed Health Plans. American Journal of Managed Care 17(3): Burke, J., and R. Pipich Consumer-Driven Impact Study. Milliman Research Report April. Cannon, M. F Combining Tax Reform and Health Care Reform With Large HSAs. Cato Institute Tax and Budget Bulletin. Charlton, M. E., B. T. Levy, R. R. High, J. E. Schneider, and J. M. Brooks Effects of Health Savings Account Eligible Plans on Utilization and Expenditures. American Journal of Managed Care 17(1): Chen, S., R. A. Levin, and J. A. Gartner Medication Adherence and Enrollment in a Consumer-Driven Health Plan. American Journal of Managed Care 16(2):e43 e50. Clark, R., and S. Schieber The Shifting Sands of Retirement Plans. WorldatWork Journal Fourth Quarter: Enthoven, A. C The History and Principles of Managed Competition. Health Affairs 12(suppl): Fronstin, P Employment-Based Health Benefits: Trends in Access and Coverage, EBRI Issue Brief No. 370, April. Washington, D.C.: Employee Benefit Research Institute a. Sources of Health Insurance and Characteristics of the Uninsured: Analysis of the 114

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