We are witnessing the beginning of the end for employer-sponsored group health insurance, and that should not surprise human resources executives of private sector companies.
If past is prologue, we need look no further than what has happened to traditional pension plans during the past 30 years to visualize the eventual demise of group health insurance.
After decades of debate about deferred compensation arrangements, the Revenue Act of 1978 authorized the retirement plans we now know as 401(k)s. According to the Employee Benefit Research Institute, or EBRI, less than two years after the law went into effect nearly half of all large private sector employers were already offering 401(k)s or considering them.
Think about how this rapid adoption of 401(k)s might apply to health benefits.
For decades, companies have tried to get their employees to help control health care spending. By any measure, that’s “mission impossible.”
That’s because employees have no incentive to control costs; they don’t know what the costs are. And because someone else is paying for most of their coverage, they probably don’t care.
But if employees are given their own pretax money to spend in one of various programs authorized by the Internal Revenue Service to give individuals tax advantages to offset health care costs, they will probably be more accountable. Two examples of such tax-advantaged programs are health savings accounts, or HSAs, and health reimbursement arrangements, or HRAs.
Many companies have already given their employees a tax-advantaged account to pay out-of-pocket medical expenses or the employee portion of health care insurance premiums. While these accounts are a step forward in encouraging employees to become more careful consumers of health care, they do little to give employees more choice or personalization in health plans as most of them are still covered by the company’s one-size-fits-all group plan.
Adding a health care exchange into the mix gives employees more choice and the ability to compare and contrast costs and plans, further empowering them when they purchase health care insurance they have chosen themselves using money from an HSA or HRA.
Now, fast-forward to what I can envision in 2020: Less than half the employees of U.S. private sector companies are covered under employer-sponsored group health insurance. Instead, more than 75 million workers receive a subsidy of tax-free dollars from their employers deposited in HSAs or HRAs and purchase their own individual or family health plans from a private health insurance exchange.
Workers making low wages receive financial assistance from the federal government and they too buy their own coverage, potentially through a public exchange run by their state or the federal government.
Why might this scenario unfold the way I describe?
First, the group health insurance model is financially unsustainable. According to the EBRI, employer group plan premiums have effectively doubled in the past 10 years. This is despite all the wellness plans, tiered drug plan designs and other programs companies have launched at great expense to attack this problem.
Second, employees will be empowered with their own spending money for health care. They will use funds from their HSAs or HRAs to pay premiums for plans they have chosen based on their actual needs and for medical services they actually use.
This alone will eliminate billions of dollars of waste by employers paying for group health plan benefits that are rarely used. If the account is set up with a rollover feature, unspent dollars will accumulate for the individual and be available the next year, providing extra incentive for employees to spend money wisely as they may need leftover funds for a rainy day.
Third, the guaranteed issue provision of the Patient Protection and Affordable Care Act, which was signed into law in March 2010, for the first time will create a viable individual health insurance market. This alone will drive 20 million to 30 million workers in small and midsize companies out of employer-sponsored group health insurance and into the individual market.
Many of them will still be employer-subsidized. This erosion of group plans will spread to even the largest corporations over time.
So what should large private sector employers do now? My advice is to embrace and fund these changes.
In using the word “embrace,” I mean that employers should welcome and support this transition as an opportunity for innovation and entrepreneurship in health care that will lead inevitably to lower costs.
By “fund,” I mean that rather than look at the health care reform act as an escape hatch, large employers should instead consider this a one-time opportunity to restructure how they provide and subsidize health care benefits so they can continue to offer them for the foreseeable future.
In this way, employers can stop shielding their employees from the real costs of health care and instead activate the real driver in cost control in America—the empowered consumer.
Workforce Management Online, June 2011 -- Register Now!