Employer-sponsored health insurance: effects on employers and employees.

Shiflet, Jennifer ; Maniam, Santhi B. ; Leavell, Hadley 等

ABSTRACT

On average, nearly 11% of the gross payroll or $5,415 is spent on medically related benefits per employee according to a United States Chamber of Commerce Survey in 2003 (U.S. Chamber of Commerce, 2003). The costs to both the employer and employee are constantly rising and debates are ongoing from conference rooms to Congress. Clearly, health insurance is an important area for employer spending and the employee.

This study will discuss the different factors facing employers and employees in medical-related insurance matters. Both employers and employees should be aware the variety of health plans and the possible problems impacting this critical choice.

INTRODUCTION

Participants in the job market look for several factors when considering employment with a particular company. One of the most important issues, besides the salary, is the health benefit package provided by an employer. However, in today's insurance market, employers and employees are facing a crisis. Employers must recognize how heavily employees value health benefits programs. Further, it is imperative that employers and employees be aware of the factors affecting their selections. Health care costs are on the rise, as well as the number of uninsured individuals. Employers have to weigh the many insurance options while accounting for lower-income employees and future retirees.

First, the study will look at a brief overview of some of the available plans. Next, the problems being faced by both the employee and employer are presented along with statistics that provide a image of the current situation. Following will be findings on methods employers are using to weather the health care crisis and other methods for employees to overcome the inherent problems. A brief summary and conclusion highlight the main points of the study.

LITERATURE REVIEW

Very few articles have been written on this subject as it is currently. The available articles emphasized only one particular factor related to this issue in their study. Elswick (2003) studied compensation-based premiums and profiled companies that are more likely to benefit from their use. She also described several well-known companies and their use of the premium program. Geisel (2002a, 2002b) highlighted the troubles with retiree health plans and emphasized the need for employers to support the economy by offering future retirees some variation of a health plan. Harwood (2002) also contributed information about the importance of offering health care coverage to employees. Economic factors and statistical data are presented along with the discussion. Another important work by Greenwald (2003) offers enlightenment in consumer-driven health plans by describing the implementation, advantages, and disadvantages of those plans. Finally, Trombly (2003) discussed various problems with health care, specifically in the distributing industry. However, his information is relevant across other industries.

Definitions

The following terms and phrases are used throughout the study.

Indemnity--This was once the most common form of health insurance
where the employee may use any doctor or hospital at any time and
must pay a "reasonable and customary" charge for such services.

Health Maintenance Organization (HMO)--Usually the least costly option
for employers, it is basically a prepaid health plan providing
comprehensive care for a monthly premium. The insured is limited to
participating doctors and hospitals, and the plan requires the
designation of a primary care provider.

Primary Care Provider (PCP)--A doctor that is specified by the insured
individual to provide service. All referrals to specialists are
handled through the PCP. Most insurance plans have a restricted list
of physicians.

Preferred provider organizations (PPO)--Similar to an HMO with
pre-negotiated rates with health care providers, but with higher
premiums. Higher levels of service and expenses are covered when
using a network provider and a lower level of coverage when the
employee goes to other doctors and hospitals.

Network Provider--Insured individuals are given an opportunity
to use any of the physicians or specialists offered by the
insurance plan. This option provides greater flexibility than
the PCP with a broader group of physicians and specialists
available.

Point of service (POS)--Similar to a PPO, but makes use of PCPs
rather than network providers. However, non-network physician
expenses are covered at the higher level if the PCP referred
the patient to the specialist.

THE PROBLEMS WITH HEALTH INSURANCE

The United States, one of the wealthiest countries in the world, seems uncivilized in the eyes of others, like the Europeans because of the U.S. health insurance dilemma. One in every seven people does not have health insurance; however, perhaps surprisingly these people are not the poorest in the country. Most of the poor, disabled, and elderly are insured by the government's Medicare and Medicaid programs. Nearly 41.2 million uninsured Americans are middle-class ("In Sickness and in Health," 2002). While 75% of them have jobs, a third lives in households with more than $50,000 in annual income. Two-thirds are under the age of 35 and most of them have the availability and option of exercising health insurance. Why should so many Americans risk their health and savings when insurance is actually offered by their employers? Most would reply that premiums are too high or they would rather spend their income elsewhere. Since employers are shifting a share of the rising costs of health care to their employees, many employees are simply not choosing to have insurance. Ironically, those individuals are partly to blame for the rising costs that employers must cover since "an uninsured ill person will often leave an illness untreated until it becomes an emergency, at which point federal law requires hospitals to care for them" ("In Sickness and in Health," 2002, p. 26). In 2001, nearly $3 billion was passed onto insured individuals and their employers through increased premiums to cover nearly $24 billion spent by U.S. hospitals to care for uninsured patients that could not pay their medical bills (Trombley, 2003).

STATISTICS ON MEDICAL CARE BENEFITS

The decision to offer medical care benefits to employees dramatically impacts a company's bottom line. In the 2002 Employee Benefit Study performed by the U.S. Chamber of Commerce, employees received an average of $18,254 worth of employee benefits in addition to wages. Figure 1 depicts how a payroll dollar was spent in 2002. The cost of benefits averaged 39% of payroll. Benefits varied significantly between companies and an average of 11% of the payroll dollar is spent on medical benefits. This translates to an additional $5,415 for an employee and does not include the amount that an employee elects to have deducted for a medical savings account.

The most common type of health plan in the survey was the preferred provider organization (PPO) health plans, offered by 67% of participating companies. Thirty-nine percent of the surveyed companies offered a health maintenance organization (HMO) plan while the point-of-service (POS) plans were offered by 18% of the employers and the indemnity plans by only 14%. The most common cost-control methods used by companies included mail-order pharmacy services, used by 57% of participating companies and preadmission certification used by 51%. The study also found that larger companies are more likely to share premium costs through proportional payments where smaller companies are more likely to fully cover premium costs. However, larger companies are more likely to provide a greater share of premium payments for dependents (spouse, child and family) than smaller companies ("2002 Employee Benefits Study," 2003). Hardest hit by insurance increases are companies with fewer than 50 employees. A National Association of Wholesaler-Distributors survey found that the rate increase was 23% compared to those with over 500 employees facing a 16% increase (Trombly, 2003).

INCREASING HEALTH CARE COSTS

A lobbyist group on employee benefit issues unanimously agreed that if health care costs continue to rise at their current rate, employers would be less likely to provide quality health coverage ("The Top Benefits Concerns," 2003). A survey performed by the Kaiser Family Foundation and Health Research and Educational Trust (see Figure 1 in the appendix) found that health insurance costs for employers increased 12.7% between the spring of 2001 and 2002. HMOs experienced the highest increase in costs this past year (2002), with premiums increasing by 13.3%. Deductibles rose most sharply with PPOs, with in-network deductibles rising 37% in 2002 ("Squeeze on Employer Health Coverage," 2002). Eighty-six percent of the respondents are very concerned about this issue and more than half do not feel that the cost increases will return to a single-digit rate in the next five years ("The Top Benefits Concerns," 2003).

Watson Wyatt Worldwide and the Washington Business Group on Health surveyed employers in the Eighth Annual Survey Report 2003 and found that the median anticipated rate of increase from 2002 to 2003 rose to 15%, leading some employers to fear a double in costs in approximately five years. Figure 2 depicts employer health care costs relative to their budget. The increase in costs have caught many employers by surprise and only 32% of employers feel they are willing or able to absorb increases ("Creating a Sustainable Health Care Program," 2003). See Figure 2 in the appendix.

HEALTH CARE PLANS FOR RETIREES

Another problem that is looming is the decline in employer-sponsored retiree health care plans. As future retirees would be forced to draw upon their own savings to pay health care premiums, little money would be left after paying the increasing premiums (Geisel, J., June 2002). A study performed by Watson Wyatt Worldwide also showed that among 56 large employers, 20% have eliminated retiree health care plan coverage for new hires and another 17% will require new hires to pay the full premium (Geisel, J., Sep 2002).

Employers may feel that they should not bother with this expenditure. However, this decision can cause an economic ripple effect since retirees having to spend their own resources on medical expenses will have less remaining purchasing power. This can be significant since Americans are not adequately saving money for their retirement. As evidenced by 20% of a highly paid group of federal workers in Washington D.C., most people do not take advantage of employer-sponsored savings plans. Additionally, when employers offer lump-sum payments when workers change jobs, employees do not take advantage of tax incentives to roll over those funds into a new savings plan (Geisel, J. June 2002). 80% of employers say that Congress should make providing new tax incentives for retiree health care coverage a high priority ("The Top Benefits Concerns," 2003).

OVERCOMING PROBLEMS WITH EMPLOYER-SPONSORED HEALTH CARE

Some economists believe that a significant part of the problem with rising health care costs is a "disconnect" between consumer (the employee) and payor (hospitals, doctors, etc.). Health care is one of the few services where the consumer is uncertain as to the quality of care and the costs involved, allowing the provider, not the consumer, to drive consumption. The answer to the problem would be to have the employer make sure the employee is a player in the game of health care ("Containing Health Care Costs," 2002).

Employers' Responses to the Problems

Employers pledge to employees that any changes will be temporary and short-term. However, employees fear the changes can easily turn long-term. Short-term cost-saving strategies include cost sharing through co-payments and premium increases, targeted interventions, cutbacks in coverage, and others that are depicted in Figure 3. The chart shows the differences in employers' planned responses to the rising health care costs between 2001 and 2002. Most employers appear to prefer increases in employee co-payments and most troubling, reduce or eliminate coverage ("Creating a Sustainable Health Care Program," 2003). Although these are unpopular strategies with employees, they are clearly preferable to no insurance (Harwood, 2002).

Compensation-Based Premiums

Some employers simply have no leeway in their budget to pay for the increasing insurance rates and are forced to pass the increases on to the employee. Fearing that lower-paid employees will drop their health-coverage altogether, some employers have begun to base health benefit premium contributions on individual's ability to pay. However, critics feel this practice fails to address the rising costs of health care and "can serve only as a temporary fix on the way to a well-designed consumer-driven health plan." See Figure 3 in the Appendix.

There are two designs for compensation-based premiums: creating salary tiers with corresponding contribution levels or basing contributions on a percentage of the employee's compensation. This tier method could possibly result in employees, at the top of their tiers, deliberately not excelling so as to avoid a boost in their contribution payment. With the percentage method, larger companies could modify contribution rates to reflect the market costs for particular locations. Although a disadvantage may be higher administrative costs if the company does not already base other benefits on a percentage of compensation, the participation rate may increase. The larger pool would translate to more insured which would in turn spread the costs. This should translate into a less-rapid less fast-paced growing insurance rate (Elswick, 2003).

TRADITIONAL HEALTH PLANS

Among the traditional health plans available, HMOs, with their smaller premiums, are becoming more attractive, especially among lower-income groups. Although HMOs had been declining over recent years, enrollment has stabilized at about 26% coverage due to the higher concern about health care costs. HMOs are the least costly plan type with an average $7,541 annual premium for a family. Many lower income workers are choosing lower cost plans and sacrificing flexibility rather than paying $1,000 in deductibles and higher co-insurance rates ("Squeeze on Employer Health Coverage," 2002).

Employee Responsibility

Some employers are deciding that the employees should shoulder more responsibility for their health and fitness. They are incurring upfront expenses to design programs to help workers improve their health, resulting in fewer claims and lower costs in the long-term. Some methods that are being implemented include the installation of gym equipment in office buildings, discounts for meeting goals through weight-loss programs, and programs that help individuals stop smoking. These programs work best in companies with a lot of employees, as those with smaller numbers may feel they are easily losing money by dealing with turnover of employees and a fewer amount of people to divide the expenses over.

More importantly, some employers are recognizing that it is necessary more than ever to promote employee wellness and educate employees on the costs of health care (Harwood, 2002). The following checklist developed by benefits specialist, Gary B. Kushner, is useful for employers to identify specific elements in educating employees:

* Inform employees about the overall purpose of the company's
health plan

* Stress the importance of wellness/prevention programs

* Identify desired outcomes (What are you asking the employees
to do to minimize costs or achieve a healthier lifestyle?)

* Detail the specific action steps for better plan utilization
(colonoscopy or mammography for those in particular risk groups)
("Containing Health Care Costs," 2002).

Kushner also emphasizes that education and communication regarding health benefits should occur on a regular basis and incentives should be built in "where it makes sense," like filling prescriptions by mail order or purchasing generic rather than brand-name prescriptions ("Containing Health Care Costs," 2002).

CONSUMER-DIRECTED HEALTH PLANS

A recent development in health insurance is a move towards "consumer-directed" plans. Under this form of insurance, employees are given a defined budget to cover usual medical expenses and receive standard health insurance with a very high deductible that would be applied if the employee had an expensive medical emergency. Any unused money from the budget would be rolled over to cushion future medical expenses. This plan encourages employees to become more responsible for their healthcare by making frugal health care decisions since they are, in essence, "paying" for their own health care (Harwood, 2002). Plan providers would offer "extensive information on health care treatment and costs to help employees be better consumers of medical services that fall within their deductibles" (Greenwald, J., 2003, p. 1). The consumer-directed plan would be most beneficial for younger and healthier employees who would most likely not have high medical bills during their first few years of employment (Harwood, 2002). The 2003 Membership Survey mentioned earlier found that 58% of companies polled consider it a high priority for Washington to encourage the development of the plans. Further, 73% of employers surveyed believe significant enrollment will occur in these plans when offered in the next five to ten years ("The Top Benefits Concerns," 2003). A survey performed by California Health Decisions found that nearly 85% of employees surveyed from June through December of 2002 had never heard of consumer-directed health plans. As shown in Figure 4, more than six out of ten respondents are willing to manage their own benefits, but no more than a third are willing to pay higher fees. The survey showed that there is very little education in regards to the different options available to employees and that there may be an emerging trend towards these plans. Although consumers do not want additional costs, if traditional plans continue to increase at their current rates, some individuals may be more willing to manage their health costs. See Figure 4 in the Appendix.

Employers interested in this new option are willing to sponsor this form of insurance even if enrollment rates are less than normal--typically about 10% for a new plan.. Pricing, communication, education and advocacy of the plan can help drive participation, as well as word-of-mouth. Strategies may include comparing how health care dollars are spent in comparison with traditional insurance plans, coverage calculators, and educating not just the employees, but their spouses and dependents (Greenwald, J., 2003).

FLEXIBLE SPENDING ACCOUNTS

Another way to retaliate against the rising health-insurance costs is flexible spending accounts (FSA). They are also known as "medical flex plans" because they allow employees to set aside pre-tax dollars each year to pay for certain expenses, such as medical, dental and vision (Harwood, 2002). With the rise of deductibles, FSAs have become more popular, with participation increasing 15% in the first quarter of 2003 compared with 2002 in a report performed by Fidelity Investments (Lee, 2003). The downfall to these plans is that employees must be thoroughly educated as to how to properly use their flexible spending account. If employees do not use the money they have set aside, they lose it (Harwood, 2002). A benefits manager for IBM employees said they leave, and therefore forfeit, about five percent of their FSA balance in their accounts each year. In spite is of that obvious drawback to this plan, President Bush has recently encouraged the use of FSAs by proposing up to $500 of the leftover contributions to be rolled over or deposited into a 401(k) plan for retirement or health expenses at a later date (Lee, K., 2003).

SMALL COMPANIES AND RETIREES OVERCOMING THE PROBLEM

Smaller companies can reduce some benefits costs by combining with other smaller business to form a larger pool through outsourcing organizations or trade association plans. This allows administrative fees and incident claims to be allocated over a larger pool of insured employees (Trombly, 2003). Some small companies are saving money by offering financial incentives for employees to waive health coverage if they can access a plan through another source, like their spouse's program. Sometimes this also helps the employee by spending fewer dollars on insurance for the entire household. This could however be a disadvantage as the employees that do not have another source of insurance may end up having higher deductibles or premiums because of a smaller pool unless they are in some sort of outsourcing organization or trade association (Harwood, 2002). In regard to the issue facing retirees, there are few solutions available. In a study performed by Watson Wyatt Worldwide, employers are typically paying more than 50% of retiree health care costs, including premiums. This figure could be as low as 10% by the year 2031. Some employers feel obligated to continue coverage to some degree for retirees and are "increasingly tying the portion of the premium dollar they will pay to the length of service by the employee, as well as lengthening the minimum service requirements employees must meet to qualify for retiree health care coverage" (Geisel, J., Sep 2002).

SUMMARY AND CONCLUSION

There is uncertainty as to what the future will bring to the realm of employer-sponsored health care insurance. In most countries around the world, "the payment for health care is viewed as a societal issue and paid for by government. The U.S. in unique in that the payment comes from the private sector" (Jusko, J., 2003). To overcome all of the options available to employers, the government may even have a say in what an employer must provide for its employees. The debate over health-care has been long-standing with little consensus between the Democrats and Republicans. A recent development has been emerging among the Democrats that the problem of the uninsured and rising insurance costs should be fixed by requiring employers to cover all their workers while easing costs with government subsidies--a far step from the health care system proposed during Bill Clinton's reign over the White House. The advantage to this plan is that it builds on what already exists--the 160 million workers and their families already insured by their employers. Companies that do not insure all workers would pay a form of tax to help fund the government-sponsored pool of insurance for uninsured employees. On the other hand, Republicans are continuing to sponsor individual coverage with tax subsidies and federal aid making policies affordable, regardless of health or income (Gleckman, H., 2003).

Employers may question the need to continue quality health care coverage to employees as the costs of health care continue to rise at rates that have never been seen before. Most employers understand that healthy employees affect productivity and performance. Research suggests that firms may benefit economically by providing health insurance coverage for workers and their families. Health coverage helps employers recruit and retain high-quality workers:

Individuals will join a company because of its health benefits and will stay with a company because of the health benefits. When competition for workers is strong, health benefits can tip the scale ... People who have good memories and loyalty will be out the window for a long time when a company plays with its workers' security for a short-term gain (Quinn, 2003, p. 1).

Healthy employees contribute to productivity by reducing the costs of absenteeism and turnover and by increasing workers' productivity. Despite the increased expenses in health care coverage, an investment on the employers' behalf can achieve a return. Although the short-term effects may appear to be drastic, employers can evaluate the different options available to offset the problems.

Short-term fixes include adjusting the amounts paid on behalf of the employee which may cause more problems in the future. Responses to the ongoing rise in health care may be promoting plans that are cost-friendly: the inexpensive HMOs and consumer-driven health care plans. Small businesses may face more difficulty than larger companies when offering insurance to its employees, however some politicians are making the inequality an issue to allow more competition in the insurance arena. Additionally, retirees are facing problems. However with instruments like flexible spending accounts, ways do exist that allow retirees to use some pretax dollars to pay for medical expenses. Government officials are also taking steps to mend the health care crisis being faced, but there have been no major steps to form a common ground between either political party. Further, it is difficult to predict what the future holds for employer-sponsored health care coverage.

Despite the factors affecting health insurance and a lack of solid solutions, employer-sponsored health insurance is very important to both the employer and the employee. The increasing number of uninsured individuals is one of the factors causing the rates to increase. With any health insurance plan offered, employers can attempt to reduce some costs in the long-run by educating employees about the decisions they can make that affect their health.

APPENDIX

[FIGURE 1 OMITTED]

[FIGURE 3 OMITTED]

Figure 2: Employer Health Care Costs Relative to Budget

At Budget 41%
Over Budget 13%
Under Budget 46%

Source: "Creating a Sustainable Health Care Program," 2003

Note: Table made from pie chart.

[FIGURE 3 OMITTED]

[FIGURE 4 OMITTED]

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Jennifer Shiflet, Sam Houston State University

Santhi B. Maniam, University of Texas Medical Branch

Hadley Leavell, Sam Houston State University

Balasundram Maniam, Sam Houston State University