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Employers Respond to Rising Costs, Grow Concerned about More Uninsured

June 18, 2002
Related Topics: Benefit Design and Communication, Health and Wellness, Featured Article, Compensation
Access to affordable health coverage is a top issue for business. Even though employers voluntarily cover 177 million employees, retirees, and their dependents, eight out of ten uninsured individuals are part of a family with at least one full-time worker. Employers know that an insured workforce is one that has less absenteeism and higher productivity. Furthermore, both public and private payers into the health care system -- to hospitals, doctors and insurance companies -- ultimately subsidize the health care costs that uninsured individuals cannot pay themselves.

Those with private health coverage end up paying three times: the premiums they pay for their own coverage, the taxes they pay which compensate providers of care to those unable to pay their bills, and the indirect costs resulting from higher provider charges to help offset losses on the uninsured and low government payments.

Unfortunately, affordable health coverage will prove to be more and more elusive for companies. Along with news of Enron and the war against terrorism, the start of 2002 brought with it a flurry of reports on rising health care spending and, in particular, its impact on employers. Consider the following:

  • The federal government reported that the nation spent $1.3 trillion on health care in 2000, up 6.9 percent from the previous year, and the biggest one-year surge since 1993.

  • Several employee benefits consulting firms reported employer health plan increases that averaged between 13 and 16 percent depending on plan type, and in some cases were reporting the third consecutive year of double-digit inflation.

  • Small employers’ health plan increases for 2002 have been averaging 20 percent, with numerous reports of increases in the range of 35 to 38 percent.

Past attempts to battle inflation
Past battles with health care inflation have generally been fought on two fronts, first by providers of care to patients and then by third-party payers. Prompted by Medicare payment design in the early 1980s, hospitals assumed direct responsibility for containing costs as public and private payers stopped reimbursing billed charges and instead calculated payments based on diagnosis and relative factors.

This means hospital reimbursement was transformed from a payment system that passively paid whatever charges the hospital billed (e.g. room and board, routine tests, medication, supplies) to a system of "prospective payment" that was based on typical charges for a particular diagnosis. A hospital that discharged patients more quickly could realize savings, while a patient with a longer stay but no added diagnoses would cost the hospital money because it would not receive any additional payment.

Other providers quickly followed suit as similar payment structures and fee schedules were implemented across the health delivery system.

In the early 1990s, employers sought to get better value for their growing health care dollar and formed purchasing coalitions to contract en masse with providers who had the best outcomes and used the most efficient methods to do so. Managed care entities also increasingly pre-screened and pre-authorized tests and surgical procedures as medical innovation offered doctors and patients more options, though at much higher costs. However, these strategies -- while containing costs and elevating treatment standards -- also led to a backlash from patients and doctors who bristled at the intrusion.

The ensuing loosening of managed care restrictions in response to market demand and legislation are a primary reason for the most recent rise in costs. More recently, health plans have sought “fourth-party” assistance with costs -- that is, sub-contractors to manage specific parts of the health care contract such as behavioral health, pharmacy benefits, and management of specific diseases.

Now the patient’s turn
Ultimately this new round of health care inflation will have as its front-line defense the patient, who will be the party responsible for the need to contain costs. Employers are increasingly turning toward cost-containment strategies that emphasize users’ awareness of the cost of health care goods and services. These strategies include increasing deductibles and cost-sharing; switching from flat dollar co-payments to sharing a percentage of provider bills, and establishing a set dollar contribution to employees’ choice of health plans. The next generation of health plans will feature new designs emphasizing wise spending decisions and are rapidly coming to market.

The increased cost burden on employees, however, means more working families are at risk of being priced out of the employer-sponsored health coverage market. Especially vulnerable are those with modest incomes who cannot afford higher monthly premiums and cost-sharing, as well as employees of all income levels who work for small employers unable to keep up with steep increases in health costs.

Furthermore, job cuts have meant that more people have lost substantial employer subsidies to health plan. Economists have estimated that for every one-percentage point increase in the unemployment rate, 860,000 more people lose health coverage. Since the start of 2001, the unemployment rate has increased 2 percentage points (from 4 percent to 6 percent), resulting in an additional 1.72 million more uninsured.

Improve access
Solutions for health care coverage are as varied as their proponents. But coverage alone is not sufficient; patients also need access to affordable services.

Funding for community-based health centers and other providers of low-cost health services is an important component in the health care infrastructure that will assist both the uninsured as well as people with private health insurance who have high deductibles or consumer-centered health plans.

Let small companies join forces
The U.S. Chamber of Commerce believes solutions for the uninsured should build on what works in the employer-based system. Small businesses on Main Street should be able to get affordable health coverage just like the companies on Wall Street -- by joining forces and self-insuring free of state mandates.

Change the tax code
At the same time, trends in demographics, work arrangements, and society itself demand new alternatives to employer-based insurance but with tax code equity that allows taxpayers to obtain coverage free of income taxes.

“Tax code equity" means that individuals could obtain health insurance on a pre-tax basis. Those who get coverage through work are not taxed on the value of this benefit provided by their employer (it's not considered income), but those who purchase individual health coverage can only deduct the coverage as any other medical expense. After adding together all medical expenditures including insurance, people who purchase individual health coverage can only deduct amounts exceeding 7.5 percent of their adjusted gross income. We would like individuals to be able to deduct health insurance expenses before calculating their adjusted gross income. Moving expenses receive this same preferential tax treatment.

Solving the problem of the uninsured requires that our nation address issues of access, affordability and quality -- three components that are inextricably linked and must be considered equally.

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