State Health Lawmakers' Digest: New Uninsured (Vol. 1, No. 3), On the Horizon

ON THE HORIZON

Employer-Sponsored Insurance

Employer-sponsored health insurance is the mainstay of the U.S. health financing system for people under age 65. Although employer-based coverage rates have remained flat since 1993 or even have risen slightly, low-income workers, workers in firms that employ greater proportions of low-wage workers and small business employees remain disproportionately uninsured.

As sharp premium increases and the prospect of a cooling economy loom, small businesses again are beginning to feel the effects of rising health insurance costs. According to a Henry J. Kaiser Family Foundation survey, premiums increased 3.7 percent from 1997 to 1998, 4.8 percent from 1998 to 1999, and 8.3 percent from 1999 to 2000. If- as analysts predict- premiums continue to rise, smaller and less profitable firms may drop coverage and larger firms may offer reduced coverage. Moreover, some large corporations have warned that proposed legislation that allows individuals to sue their employer-sponsored plans could cause larger firms to withdraw from the market altogether in fear of litigation. In light of the widening coverage gaps, a number of alternatives have been proposed.

Several strategies aim to reform the employer-based system by improving economic incentives and augmenting the purchasing power of disadvantaged employees and employers. Changes in federal and state tax policies would improve economic incentives in defined contribution programs, in which workers receive cash transfers or vouchers from employers to purchase coverage from a selection of plans. Premium assistance programs aid small businesses and low-income workers through public and private partnerships. These have been modestly successful in a few states (Washington, Massachusetts, California) but the cost of subsidies and concerns about crowd-out have limited their size and effectiveness. Insurance purchasing pools to give small firms and self-employed individuals the leverage typically available to larger businesses have been a mainstay of state experimentation, with limited effect. Some states (New Mexico, Arizona) use reinsurance programs to bring carriers together to manage risk and insure against loses. This approach is designed to make private insurance more available by compensating for disparities in health.

Another set of proposals creates alternatives to an employment-based system. State and/or federal tax proposals to induce workers to purchase individual coverage range in complexity from simply equalizing the deduction self-employed and employed workers get for health coverage, to tax credit schemes that may include complex risk and income adjustments. Medical savings accounts (MSAs) are proposed to encourage consumer responsibility through catastrophic medical coverage and individual tax-exempt medical savings accounts. The 1997 federal Health Insurance Portability and Accountability Act permitted a limited MSA experiment.

Reports of the demise of employer-based coverage have been exaggerated. But if--or more likely when- coverage again falls, policymakers will turn to these proposals to augment or even replace the employer-sponsored system. Given the equipoise of the current Congress, the likeliest federal action would be to allow states greater scope to continue these experiments.

A March 2000 in-depth review of this issue is in New Jersey's Forum Issue Brief No. 33 "The Future of Employer-Based Health Plans" (http://www.forumsinstitute.org/publs/ib33.pdf). Also see Health Affairs 18, no. 6 (November/December 1999).

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