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Employment and Health Benefits: A Connection at Risk (1993)

Chapter:7 FINDINGS AND RECOMMENDATIONS

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Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
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7
Findings and Recommendations

In some ways the public interest resides in the no man's land between government and business.

E.E. Schattschneider, 1960

Yes, I favor national health insurance as long as you don't have the government too involved.

Focus group participant, 1992

If we are going to govern ourselves without inflating our governments more and more, the nongovernments in our society will have to think of themselves quite self-consciously as part of governance.

Harlan Cleveland, 1937

The United States can make more constructive use of its mixed structure of public and private health coverage. Doing so will require, at a minimum, a new self-consciousness about the role of the employer and significant changes in the relationship between the public and the private sectors in the governance of the nation's arrangements for financing and delivering health care.

Precedents for such change exist. Beginning in the 1930s and 1940s, voluntary private initiative combined with some indirect regulatory stimulus helped produce for millions of Americans a remarkable breadth, quality, and depth of medical care and medical expense protection. In the mid-1960s, the nation reached a consensus that public programs were necessary to finance appropriate coverage for the elderly (through Medicare) and some of the poor and near-poor (through Medicaid), although the latter program has failed to reach many low-income individuals and families. Now, at the end of the century, renewed creativity and public-spiritedness are required to devise and negotiate public and private initiatives to protect more Ameri-

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

cans against the costs of ill health, to achieve health outcomes commensurate with the resources expended for health services, and to encourage broad risk sharing among the well and the ill.

Reform that maintains a major role for employment-based health benefits is certainly not the only option for the United States, as witnessed by proposals for a single government program, on the one hand, or for a market based on the individual purchase of insurance, on the other. Some members of the Institute of Medicine study committee believe that improving the employment base has more pragmatic and philosophical appeal than abandoning it. Other committee members disagree and believe this base is too structurally flawed to ever meet basic access, quality, and cost objectives. In any case, no one should expect that a significantly more equitable and cost-effective system of employment-based health benefits can be obtained without major adjustments in current arrangements.

In examining today's structure of employment-based health benefits, the committee had two basic tasks, one empirical, the other evaluative. The first task—to understand and describe the current system—provided the focus of the preceding chapters. This task was a challenge given the system's variability, its bent for change, and the limited evidence to distinguish the consequences of employment-based health benefits from those of third-party payment in general or from other features of health care financing and delivery in this country.

The committee's second task gives rise to this concluding chapter, which presents the committee's assessments and findings. What follows is (1) a brief recapitulation of themes to this point, (2) a characterization and assessment of key features of this country's system of voluntary employment-based health benefits, (3) a set of findings and recommendations about how this system might be improved, (4) a few comments on practical and technical challenges, and (5) a number of suggestions for future research.

The findings reported here do not constitute a blueprint for health care reform, even for reform that seeks to build on voluntary employment-based health benefits. In particular, the findings do not address the most effective means to limit the rapid escalation in health care costs and define the appropriate role of advanced technologies, two issues that trouble all economically developed countries, regardless of their system of medical expense protection. In addition, the discussion here does not touch directly on the problems facing Medicare, Medicaid, and other public programs, although the committee recognizes that efforts to resolve these problems cannot go forward in isolation from the system examined here.

Instead, this chapter sets forth some steps that government, business, individuals, and health care practitioners and providers could take to alleviate certain problems related to the link between the workplace and health benefits. These steps are grouped into two divisions: one that assumes the

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

preservation of a voluntary system of employment-based health benefits and a second that assumes that a move beyond a voluntary system is required if the nation is to extend access significantly and use resources more effectively to improve health status. These steps do not constitute a general committee endorsement or rejection of either a voluntary or a compulsory system of employment-based health benefits.

RECAPITULATION

The preceding chapters have examined the evolution of employment-based health benefits in the United States, described basic coverage and management features of the current system, and identified several sources of variation across workplaces. They have depicted some of the practical implications for employers, employees, and health care providers of employer involvement in managing health benefits. The troublesome problems of biased risk selection and risk segmentation have been examined, along with some proposed responses to these problems. Finally, concerns about the level and rate of increase in health care costs and the means of controlling costs have been explored. The focus has not been on costs as such but rather on the value achieved for health care spending compared to alternative uses of limited resources.

Clearly, this nation's continued reliance on voluntary employment-based health benefits to cover most workers and their families reflects a distinctive American history. One facet of this history is the result of the creative private efforts of employees, trade unions, employers, health care providers, and others to develop mechanisms to spread and budget the risk of medical expenses for many workers and their families. Another facet of this history involves a cultural predilection for private rather than public action, which has contributed to the repeated failure of proposals to extend social insurance programs to cover medical care expenses for the entire population. Instead, the public interest has been reflected in tax, collective bargaining, and other policies that have directly and indirectly shaped and stimulated a voluntary system of employment-based coverage for workers and their families. The adoption of Medicare and Medicaid in 1965 and Medicare's expansion to include the disabled in 1972 brought public insurance to many of those for whom private insurance was ill-suited.

In 1974, under the Employee Retirement Income Security Act (ERISA), the national government assumed sole authority to regulate employee benefits. It has not, however, exercised much regulatory oversight in the health benefits arena. The states still have some indirect influence when employers transfer financial risk for their health benefit programs to insurance companies, which states may regulate under the McCarran-Ferguson Act of 1945. The impact of state regulation has, however, diminished as more and

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

more employers have opted for self-insurance arrangements that are exempt from state oversight and as the courts have broadened the interpretation of ERISA's preemption of state statutory and common law in matters "related to" employee benefits.

Overall, for most Americans with a strong connection to the workplace, the system provides very reasonable access to the benefits of biomedical science and technology at a relatively modest direct personal cost in the form of premium contributions and other cost sharing. When people are asked to rate the most important employee benefit, a substantial majority select health benefits. Surveys also indicate that more Americans think employers rather than government should be the most responsible for providing health benefits for full-time employees and their dependents, although no specific plan design or policy commands the unequivocal support of the majority.

The offering of employment-based health benefits is virtually universal in large and medium-sized organizations. These organizations generally cover a large portion of the cost or premium for employee coverage but vary considerably in their contributions for family coverage. They often help employees understand their health coverage and resolve problems with specific health plans. Employers have become increasingly active in the management of health benefits by offering employees choices among competing health benefit plans that limit employee choice of health care practitioner, adding managed care features to indemnity health plans, and developing workplace health promotion programs. At the same time, some larger employers are focusing—more than ever before—on how they can have employees pay a larger share of costs directly, how they can avoid sharing the risk for medical care and benefit costs for anyone other than their employees and, perhaps, their dependents, and how they can get the best possible rates from health care providers regardless of the impact on others in the community. In this latter regard, they join Medicare, Medicaid, and some network health plans in contributing to concerns about cost shifting, that is, the attempt by health care providers to make up for certain payers' discounts and underpayments through higher charges to less powerful groups and individuals.

Table 7.1 depicts some of the important functions assumed by employers and their relative difficulty or complexity. In general, the participation by employers in these functions falls off sharply between the first and second functions (particularly among small employers) and the second and third functions represented on the left side of the table. The table does not attempt to rate employer performance or to portray the positive and negative effects on employees or the community that may follow from specific steps taken by employers in carrying out these functions.

Only about half of all workers are employed by the large and medium-

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

TABLE 7.1 Broad Functions or Activities That May Be Undertaken by Employers Providing Health Benefits, Arrayed by Approximate Level of Administrative Difficulty or Complexity

LEAST DIFFICULT OR COMPLEX

 

MOST DIFFICULT OR COMPLEX

 

Direct Contracting with Health Care Providers or Direct Provision of Health Care Services

 

 

 

Direct Administration of Claims, Utilization Review, and Other Management Functions

 

 

 

Extensive Tailoring and Detailed Oversight of Health Benefit Program

 

 

Contributing to Plan Premium, Monitoring Basic Aspects of Health Plan Performance, Assisting Employees with Problems

 

 

Facilitating Participation in Health Plan: Enrollment, Information Distribution, Payroll Deduction

 

 

 

sized organizations in which health benefits are virtually universal, and this fraction is declining. Among organizations with fewer than 10 employees, one survey suggests that only one quarter offer health benefits, although another survey suggests that proportion may be nearer to half. Moreover, efforts to reach employees of small firms through "bare bones" insurance and other relatively inexpensive products have had limited success. The reasons are diverse: many small employers feel that even limited coverage is still too expensive; others believe their employees do not need or want it; and some do not see its provision as an employer's responsibility. In general, the problems and options regarding health coverage faced by small organizations differ in significant ways from those faced by larger organizations. Many proposals for health care reform are particularly targeted at small employers.

High health care costs are frequently portrayed as the nation's number one health policy problem, but the problem is more complex. That is, the country is spending a greater share of national resources on medical care

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

and making it less affordable for many without being confident that it is achieving better health outcomes, greater labor productivity, or other equivalent value for its increased investment. Efforts to accumulate evidence on outcomes and to evaluate and compare the costs and benefits of alternative medical practices are increasing in number and sophistication. Nonetheless, the resources devoted to these efforts are minuscule compared with those devoted to new medical treatments and technologies, and—as noted later—this is an area in which further research is a priority.

In considering the current system of voluntary employment-based health coverage and various proposals for change, it is important to remember that coverage is not the same as access. Some who have coverage still face access problems by virtue of their location, their race or other personal characteristics, or specific characteristics of their coverage, such as low rates of payment for physician services. Likewise, even those who lack health insurance have some access to care on an emergency basis for serious illness or injury, although the financial burden of this uncompensated care is very unevenly borne across communities. Access to preventive and primary care services is much more difficult for the uninsured, although public and private outpatient programs and charity care offered by individual practitioners do help some needy individuals who lack health coverage.

Extending health insurance to the currently uninsured population would not guarantee adequate access to appropriate health services, but it almost certainly would assist them in obtaining preventive and primary care that could improve their health status and quality of life. Whether some of the currently uninsured—and some who are now insured—would be better served by direct care arrangements (such as the U.S. veterans hospitals or publicly funded preventive and primary care clinics) or some other alternative or supplement to individual health insurance is a serious question, one that is not much discussed in the current debate over health care reform.

FEATURES, STRENGTHS, AND LIMITATIONS OF THE CURRENT SYSTEM

Any concise statement of key features of the U.S. system of health care coverage and the role of employment-based health benefits must simplify and generalize from a world that is neither simple nor uniform nor static. Nonetheless, based on the descriptions and analyses presented in the first six chapters of this report, the following nine characteristics stand out:

  • Voluntary group purchase 

  • Lack of universal coverage 

  • Dispersed power and accountability 

  • Diversity

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×
  • Innovativeness 

  • Discontinuity 

  • Risk selection and discrimination 

  • Barriers to cost management 

  • Complexity.

Most of these characteristics distinguish the system in the United States from systems in other advanced industrial nations and from what is envisioned by proposals for a fully public system of health insurance. They are not, however, purely a function of voluntary employment-based health coverage. If the link between employment and health benefits were abandoned or retained only as a conduit for financing health benefits, some of the features discussed below would likely disappear, but others might persist—or even become more prominent—depending on the specific changes made. Reforms that retained a significant role for employers might bring significant or only marginal changes, again depending on their specifics.

Voluntary Group Purchase

The very subject of this report is a defining, indeed unique, feature of the U.S. health care system: reliance on health benefits voluntarily sponsored by employers—or collectively bargained between employers and unions—to cover the majority of nonelderly individuals. The use of the employee group (more specifically, the larger employee group) as a basis for health insurance has mitigated the problems of risk selection that plagued initial private efforts to insure individual expenses for medical care. It has offered an alternative to government mandates but still created purchasers with more leverage than single individuals can normally bring to bear in buying health insurance, identifying and resolving problems, and securing efficiencies in program administration.

Once an employer opts to offer health benefits, some governmental limits on its discretion may apply. For example, employers are generally required to provide employees with certain summary information about their health plan, offer continued coverage to former workers and others under certain circumstances, and cover workers aged 65 to 69.

In assuming the purchaser role, the main question for employers has been what, if anything, do they need to offer as health benefits to attract and maintain a productive work force and to compete or otherwise function effectively. The collection of employer—and employee—responses to this question have in large measure defined the current system (both its public and its private aspects) and directly affected both the definition and the realization of broader societal objectives. Most proposals to eliminate the voluntary character of the current system through mandatory public, employer, or individual coverage are a response to the following characteristics of this system.

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

Lack of Universal Coverage

Group purchasing voluntarily supported by employers helps make health coverage possible for many who would likely go without it in the current market for individually purchased insurance. Nearly two-thirds of Americans under age 65, almost 140 million individuals, are covered by employment-based health benefits. Another 10 million of those aged 65 and over have Medicare supplemental benefits provided by a former employer. Compared with the previous system in which neither government nor employers assisted individuals in covering medical care expenses, this system has undoubtedly expanded health coverage.

On the other hand, more than 35 million Americans lack insurance, and the great majority of those without health benefits are workers or their family members. Virtually every other advanced industrial nation covers all, or all but a very small fraction of, its population. Most either require employers to help finance coverage for workers or strongly encourage them to do so through positive incentives or subsidies aimed at the employer or employee or both, and most have special provisions for those with limited links to the work place. In contrast, many U.S. employers choose not to offer health benefits to all or some of their employees. Such employees are especially likely to work part-time, on a seasonal basis, or in low-wage jobs for small employers. Some, if offered a choice of health benefits versus higher wages or the opportunity to work full-time, might decline the former—as do some workers today.

Risk Selection and Discrimination

Employment-based health insurance was initially a powerful vehicle for spreading risk among the well and the ill, and it still offers distinct advantages over the current market for individually purchased coverage. In recent years, however, some of the advantages associated with employment-based coverage have been diminishing, most notably for employees of small organizations but increasingly for those who work or seek to work for larger organizations. For employers as well as insurers, the selection of low-risk workers or enrollees or the use of rules regarding preexisting conditions to exclude high-risk workers from health plans can be a more attractive strategy for limiting costs and increasing profits than trying to manage health care utilization or prices more effectively. Although federal law limits the use by employers of medical examinations and questionnaires, employers can generally obtain from their health plans extensive medical information about employees and their families. They have the potential to use that information to make overt or covert decisions about workers' continuing employment, a particularly troublesome form of risk selection. Rapid ad-

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

vances in genetic technologies for identifying individual risk for various diseases is making information available that could be used by insurers or employers to limit coverage for an ever-larger proportion of the population.

Dispersed Power and Accountability

It is in the nature of both voluntarism (as a mechanism for decisionmaking) and federalism (as a form of government) to disperse power, although the degree and nature of this dispersion can be quite variable. For example, the current structure of voluntarism in the health sector concentrates a great deal of discretion with the employer. It also leaves employers free to require employees to select insurance or show evidence of another source of coverage, and many employers do so in order to discourage adverse selection in the organization's health benefit program. Although the structure may not give as much discretion to the employee as to the employer, the employer may be in a better position than the individual to use its purchasing power to secure better prices, services, and disclosure of information from health plans. At their best, employers are available—and have a direct financial incentive—to act as ombudsmen for their employees and to support them in making informed decisions and resolving problems. Such assistance is less readily available to those with Medicare, Medicaid, or individually purchased private insurance.

On the other hand, with power dispersed to organizations of vastly different sizes and resources, large purchasers have had much more leverage than small employers to negotiate with health care providers for discounts and other favorable payment arrangements. One consequence of this heterogeneity is a considerable amount of cost shifting, which occurs when providers are able to offset discounts or other reduced payments from some purchasers by increasing charges for smaller, weaker, less aware, or less concerned purchasers.

Among governments, the power to regulate employee benefits is no longer delegated to the states but reserved for the federal government through ERISA. Because the federal government has, in practice, chosen to leave many important aspects of employee health benefits unregulated, the power to provide, negotiate, and restrict such benefits devolves to thousands of self-insured employers of widely differing competence, outlook, and accountability.

Diversity

Virtually every employer's program of health benefits differs from every other employer's program in some aspect (e.g., who is eligible for coverage, through what kinds of health plans, for which kinds of services, with

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

what level of employee cost sharing and other cost containment features, and at what overall cost). Although other nations vary substantially in the uniformity of their systems of health care, none appears to permit the degree of coverage, eligibility, and other variability seen in this country. Nonetheless, even amidst the microlevel diversity of the U.S. system of employment-based and public health coverage, specific patterns have developed that are associated with variations in employer size, region, industry, and other factors. In addition, voluntary efforts and government regulations have over time reduced some of the variability inherent in the U.S. system.

Behind these patterns and trends, however, and certainly behind the broader generalizations offered in this report, lie substantial differences in the cost and quality of health benefits that may be quite important for individuals in need of care and for those who share in its financing. A change in employer policies or a change of job may bring better coverage, poorer coverage, or no coverage at all. It may bring more choice among health plans or less and more freedom or less to select or continue with a health care practitioner of one's own choosing.

Although employers—especially smaller employers—do not necessarily provide choices for employees and some provide choices only because the HMO Act of 1973 mandated it, the interaction of employer and worker interests has certainly given Americans more health plan options than citizens in most or all other countries. On the provider side, the multiplication of health plan options and features has promoted diversity in the prices paid by different purchasers and, as described below, in the administrative practices with which providers have to comply.

Innovativeness

In addition to their diversity at a given point in time (and in part because of it), the design of employment-based health benefit plans is quite dynamic, inventive, and changeable over time. Compared to other nations, the United States has witnessed great innovation and entrepreneurship in the creation and marketing of health plans and coverage options and in the design or modification of cost containment and quality assurance strategies.

For a variety of reasons, including generous government support, a large pool of talented researchers, and leadership from academic health centers and voluntary organizations, the United States is also a leader in clinical and health services research. Although their specific influence cannot be easily identified, the country's largest employers and unions have helped encourage certain fields of research, in particular, the devising of practical methods to measure health status and quality of care, to assess the benefits and costs associated with specific medical services, and to compare the performance of health care providers.

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

Innovativeness is widely viewed as positive, but the ultimate value of many health care innovations may be difficult to assess, particularly when individual and collective interests diverge. Some—such as flexible benefits, choice among health plans, expanded coverage of preventive services, and case management—are viewed positively by many employers and employees. A number of techniques and strategies developed in these areas are being carefully studied by other countries for possible implementation to help overcome their own problems with rising costs and ensuring good quality care. On the other hand, some innovations, such as health plan tactics to attract low-risk and avoid high-risk individuals, may have negative effects for many and for society as a whole. Some observers consider many innovations to be merely ''Band-Aids" for a flawed system or counterproductive steps for a society that should be concentrating on fundamental reforms.

Discontinuity

Although many of the above characteristics produce positive social products, they can also promote discontinuity of health coverage and health care. They are thus a mixed blessing. From one year to the next, an employer may add or drop health plans, increase or decrease the types of services covered, increase (but rarely cut) the level of employee cost sharing, change provider networks, or make other major and minor changes in the health benefits offered to employees. Some individuals lose some or all coverage when they voluntarily or involuntarily change jobs or move from welfare to working status. Others suffer "job lock" or "welfare lock" rather than voluntarily give up medical coverage. Sometimes financial protection is continuous, but the continuity of medical care may still be disrupted because a new job's health plan may require a change of health care practitioner. Such discontinuity of care for those with serious health problems is likely to become an increasingly urgent issue as more employers and health plans attempt to restrict individuals to defined networks of health care practitioners and providers, especially if they periodically drop and add networks. Through both their general commitment to universal coverage for basic health services and their national health plans or regulatory standards for sickness funds and similar organizations, other economically advanced countries generally limit the opportunity for changes in job status or employers' policies to interrupt care or coverage.

Barriers to Cost Management

Whether the measure is health spending as a percentage of the gross national product or spending per capita, the United States is noted for spending considerably more on health care than other nations. However, virtually all

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

economically advanced countries—regardless of how they finance and deliver care—are concerned that their health care costs are too high or at least increasing too quickly. Furthermore, given the nation's wealth, commitment to medical research and technological development, and other factors, it is quite possible that the United States would lead the world in the proportion of national resources devoted to health care even if 20 or 40 years ago it had adopted the social insurance model for health coverage that is commonplace elsewhere.

Overall, employers' capacities and incentives to manage health benefit programs effectively are quite uneven and likely will remain so. For most employers, managing health benefits remains a secondary issue. At their best, employer skills in health benefit management can be quite sophisticated, but Chapter 4 makes clear that the deployment of these skills depends on a significant commitment of resources and that such commitment is mostly limited to some larger employers.

Although the net effect is a matter of controversy, using the workplace as the base for health benefits for most people under age 65 and granting employers extensive discretion to design and manage their health benefits almost certainly add to systemwide administrative costs.1 A competitive system based on individual purchase of insurance (through vouchers or other means) could have high marketing and other administrative costs, depending on the degree of regulation and uniformity imposed. It is generally assumed that a single national health insurance scheme similar to Medicare would generate lower administrative costs.

Today, whether a government program or a more competitive market would better control the total future cost of health care is a central question in the debate over health care reform. Some criticize this nation's decentralized employment-based system as lacking the clout to control prices and allocate resources that they say a single-payer or all-payer system would have. Others criticize both public and private payers for failing to adopt the kind of market-based incentives that they believe would result in more efficient and effective use of health care services. The evidence and arguments reviewed by members of this committee led them to no definitive conclusions, although various members had strong (and conflicting) views on desirable future strategies.

Complexity in Coverage, Administration, and Regulation

Several of the features singled out above—diversity, innovativeness, risk segmentation—contribute to another distinctive feature of the U.S. Health

1  

The controversy involves how administrative costs are to be counted (particularly those seen as indirect or hidden), what effect they have on total spending, and what value is obtained for that spending.

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

care system: the immense complexity of its public and private methods for providing and managing health benefits. The combination leads to a great array of differing coverage features and administrative procedures that have been devised by insurers, claims administrators, and others in response to different employer priorities, employee values, and government policies. Individually purchased insurance, while certainly not simple for consumers to evaluate, is less administratively complex in some respects—if only because individuals lack the leverage and the desire to obtain the customized cost management, data collection and reporting, and other health plan features that many employers successfully demand from insurers and providers.

On the other hand, it cannot be denied that Medicare has created a complex maze of accountabilities and administrative procedures that dismays both beneficiaries and health care providers and that equals or exceeds the complexity of individual employer programs. Nonetheless, employer actions to tailor their health benefit programs to their own circumstances and values have clearly multiplied the number of mazes to be negotiated, especially for health care providers. Although individual employers may weigh the virtues of more complicated programs against the complexity of administering them, no comparable process exists to weigh advantages and disadvantages for the health care system as a whole.

Strengths and Limitations

The above discussion portrays a system with both positive and negative features that appear to be related at least in part to this nation's distinctive reliance on voluntary employment-based health benefits. Many of the negatives are experienced most acutely by small employers and their employees, and certain of the positives may accrue mainly to larger employers and their employees. As noted, the system has made coverage possible for many who would find it difficult to secure coverage in the current market for individually purchased insurance.

Some or most of the negative features of the U.S. system are nonexistent or less serious in other economically advanced countries. As discussed in the section following this one, some weaknesses might be completely or partly resolved by certain reforms in the U.S. health care system, including some reforms that would retain a significant role for employers. Depending on their specifics, however, reforms (including those that dispense with employment-based coverage) might leave other negative features untouched, make some problems worse, or weaken certain positive features of the current system.

Certainly, individuals who have employment-based health benefits are by and large satisfied with them, although satisfaction with the health care system overall is relatively low. Moreover, even though larger employers

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

generally report that they are very worried about the cost of health benefits and pessimistic about their ability to control these costs, most seem reluctant to give up their sponsorship of these benefits, particularly if the alternative is a government-based system.

The committee found it impossible to characterize several of the features described above as simply strengths or simply limitations. It did, however, place lack of universal coverage, discontinuity of coverage and care, risk segmentation, barriers to cost management, and complexity on the negative side.

Each of these negative features may be viewed, to some degree, as a generally unwanted but necessary consequence of efforts to achieve some more positively viewed objective. Few would argue that public or private decisionmakers have deliberately sought these ends or viewed them positively. The exception may be risk segmentation, which is viewed by many insurers and some economists as both fair and efficient. Many employers reject that view as it applies within their employee group but support it as it applies to outside individuals and groups. This committee rejects the argument for risk segmentation on both philosophical grounds (i.e., the least vulnerable should share risk with the most vulnerable) and practical grounds (i.e., competition based on risk selection should be discouraged in favor of competition based on effectiveness and efficiency in managing health care and health benefits).

Most of the other characteristics discussed above have both positive and negative aspects. Americans tend to value voluntary initiative and distributed power as barriers to overweening government control of individual and business life. Diversity is one face of this country's generally treasured pluralism, and innovation is regarded as a source of wider choice and improved medical care. However, there are negative sides to each of these features, for example, when innovation focuses on ways to avoid insuring the ill or high-risk individual. This kind of innovation is unproductive and distracts from more socially productive creativity to improve the efficiency and effectiveness of health services.

In sum, today's system of voluntary employment-based health benefits earns both high and low marks. It is a dynamic one that continues to change in both positive and negative ways. This committee believes that the negatives are becoming more significant and need to be confronted through both public and private action if the nation wants to preserve a constructive role for voluntary employment-based health benefits.

FUTURE DIRECTIONS

In response to the limitations identified above, what changes might be undertaken in employment-based health benefits that would not do appre-

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

ciable damage to the system's strengths? The committee's findings and recommendations are presented in two parts. The first part assumes the continuation of a voluntary system. The second part sets aside this assumption and briefly examines the options for some form of compulsory coverage. Both make only limited reference to Medicare and Medicaid, quality improvement, data systems, and other areas in which policy changes have been recommended by the IOM and others. Neither significantly addresses the fundamental technological and social trends that are troubling the health care delivery and financing systems of all economically advanced countries, regardless of their system of medical expense protection.

Nearly all members of this committee2 believe that without the first set of changes described below, the system of voluntary employment-based health benefits will significantly deteriorate and even collapse in some sectors. They also believe that even with these changes, a voluntary system will be unable to either significantly expand and subsidize access to health benefits for those in need or manage the problems of risk selection that so undermine the current system. Indeed, piecemeal change could further destabilize rather than strengthen the small-group market. Thus, although committee members are not united on a single specific strategy that either involves or excludes employers, nearly all believe some form of universal, compulsory coverage accompanied by major financing reforms is essential.

The committee agreed that what follows should not be interpreted as either an endorsement or a rejection of employment-based health benefits. On the one hand, a substantial minority of the committee believes employment-based health coverage is, on balance, not socially desirable, except perhaps as a financing vehicle and a supplement to a national health plan. In contrast, other committee members believe that an employment-based system can—if significantly restructured—serve the country as well or better than the likely alternatives and that such restructuring is the most workable strategy for securing reforms that move the nation toward universal coverage.

To Improve a Voluntary System

Table 7.2 summarizes the committee findings and recommendations that are discussed in this section and the next. It also links the findings to the weaknesses in the current system identified earlier. The emphasis in the first subsection is on the problems created by risk selection and risk segmentation in both large and small employee groups. The final four subsections emphasize the committee's concerns about the affordability of coverage, its continuity, and its stability.

2  

See the supplementary statement at the end of this chapter for one member's dissenting views.

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
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TABLE 7.2 Summary of Committee Findings and Recommendations on Steps to Respond to Certain Current Limitations of Voluntary Employment-Based Health Benefits

Current Limitation

Responses that Continue a Voluntary System

• Risk Segmentation

• Lack of Coverage

Risk selection should be controlled as it affects individuals in large and small employee groups through steps that

• prohibit insurance companies from denying coverage to groups and individuals within groups based on their past or expected health status or claims experience;

• price coverage to individuals without regard to medical risk or claims experience;

• amend the Employee Retirement Income Security Act (ERISA) to prohibit medical underwriting practices in employee health benefits;

• amend ERISA (through provisions analogous to those contained in the Americans with Disabilities Act) to regulate employer access to individual medical information collected in connection with employment-based health benefits;

• devise methods and mechanisms (such as purchasing cooperatives) for risk adjusting employer and government contributions to health plans to reflect the risk level of enrollees; and

• extend public subsidies to help employers, employees, or both purchase health coverage for workers and their families.

• Discontinuity

• Complexity

National (ERISA) regulations or national standards for state regulation should be adopted to fill selected gaps and achieve more uniformity in the oversight of employee health benefits (e.g., solvency regulations, medical expense payments as percentage of total health plan expense, definition of basic benefits, coverage for workers changing jobs, and data collection protocols).

Current Limitation

Responses that Go Beyond a Voluntary System

• Lack of Coverage

• Risk Segmentation

The above responses will not significantly extend access or control Risk segmentation and thus should be augmented by policies that

• require that all individuals have coverage through a mandated Employer program, mandatory individual purchase, public Provision, or some combination of these approaches; and

• minimize the financial burden of such coverage on low-income individuals and low-wage organizations.

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×
Reducing or Compensating for Risk Selection

As a first priority, if a system of voluntary employment-based health benefits is to be maintained and improved, risk selection and risk segmentation must be significantly reduced as they affect both large and small employee groups. Movement in this direction will require a set of interrelated actions affecting (1) underwriting practices, (2) employers' access to medical information, and (3) methods and mechanisms for risk adjusting employer or government contributions to health plans and for monitoring health plan behavior. Because these changes will do little to make health benefits more affordable and will likely increase costs for some, new subsidies to help lower-income groups (or their employers) purchase health benefits will be necessary. Even then, some will choose not to purchase coverage.

Medical underwriting in the small-group market To reduce risk selection and segmentation in the insurance market for small groups, one step that policymakers can take is to prohibit insurance companies from denying coverage to groups and individuals within groups on the basis of their past or expected health status or claims experience. In addition, what an individual pays for health coverage also should not, in principle, be based on her or his health status, past medical expenses, or similar factors, although the initial stages of policy change and implementation may concentrate on the narrowing of price differentials. The committee recognizes that these steps by themselves could encourage some insurers or health plans to be even more energetic in their efforts to attract the well and avoid the ill and could encourage some low-risk individuals to drop coverage if their premiums increased. Some of the steps discussed below address these problems.

Although the committee sees some merit in the argument that individual prudence may be encouraged by relating health status or health behavior to individual payments for health benefits, most members believe that such risk rating of health coverage is, on balance, neither fair nor productive. Genetic, economic, cultural, and other factors determine individual health and limit individual self-determination in ways that are not well understood and that in the end serve to undermine the prudence argument. In addition, identifying a risk factor is not the same as identifying a reliable and successful strategy for reducing the risk and its health consequences. Those who support positive health promotion strategies and incentives for healthful behavior in the workplace must also recognize these uncertainties and exercise care in their promises and programs.

Medical underwriting among larger employers Steps to modify the small-group insurance market would not affect risk selection as it is practiced among larger, self-insured employers, where the committee sees disturbing signs that the concepts of medical underwriting and risk segmenta-

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

tion are becoming more attractive to financially pressed employers. To prohibit medical underwriting within self-insured groups would require federal action to amend ERISA. If action on the small-group insurance market were undertaken at the federal level, then provisions related to medical underwriting affecting both small and large groups could be explicitly coordinated.

Protection of personal medical information Even if explicit medical underwriting disappears, the health benefit costs of experience-rated and self-insured employers will be affected by the health status, age structure, and other characteristics of the work force. Thus, some may still be tempted to reduce their exposure to high health care costs by using information obtained through their health benefit plans to discriminate against high-cost and high-risk workers.

To discourage this form of risk selection, employer access to certain kinds of information collected in connection with employment-based health benefits should be limited through provisions analogous to those contained in the Americans with Disabilities Act of 1990 (ADA). Although ADA prohibits certain employer-required physical examinations and questions about employee or family health status and restricts access to permitted sources of information, it does not restrict access to information available from claims data, medical underwriting questionnaires, or other sources of data associated with employment-based health benefits. This information, which involves covered family members as well as workers, can be as revealing and potentially damaging as that covered by ADA.

Information restrictions that are analogous to those in ADA might define what kind of individual-specific information insurers, claims administrators, or similar entities may share with employers; what employer uses of the information are permissible (e.g., detecting fraud or developing programs to target specific health problems, such as premature births); which staff may have access to the information; and how shared information is to be stored. They might also have to define more specifically the rules for employers who choose to self-administer claims and who thus have the greatest access to personal information about employees.

As long as employers' payments for employee health benefits vary depending on the health status of their workers, employers will still have an incentive to avoid high-risk or high-cost workers or dependents above and beyond that related to their concerns about workers compensation, absenteeism, and similar costs. Bringing self-insured and experience-rated employers back into a broader community risk pool would lessen the motivation for discrimination. Absent movement in that direction, regulatory, educational, and other efforts to discourage discrimination have an important role, although covert discrimination is difficult to detect and eliminate.

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

Risk-adjusted employer contributions to health plans An end to medical underwriting may diminish one source of risk segmentation, but it would leave other sources unaffected. As long as health plans can reap sizable financial advantages from favorable risk selection, they will have an incentive to devise creative and difficult-to-regulate tactics to do so. To discourage these tactics and encourage stability, some protection is needed for health plans that have existing high-risk enrollments, services, features that attract sicker individuals, or other characteristics that do not warrant marketplace penalties. One protection is risk-adjusted contributions from employers or governments, although additional protections involving very high cost individuals will still be needed.

Unfortunately, the methods to assess relative risk or determine appropriate payment adjustments are still in their infancy. They are relatively weak, often require data not readily available when needed, and may incorporate unwanted incentives for inefficient behavior. Several employers are using different methods to make risk-adjusted payments to health plans, and a number of public and private research projects are under way to build better methods. Slow progress in risk-adjustment methodologies is probably the single greatest barrier to making competition a more positive force in the health care arena.

Purchasing cooperatives The mechanisms as well as the methods needed to make risk-adjusted payments are inadequate in significant respects. Small employers, in particular, lack the resources to manage risk-adjusted contributions for the plans they offer to employees. Some kind of external mechanism is needed to handle the process, for example, as the government does in its administration of capitated payment for HMOs enrolling Medicare beneficiaries. Purchasing cooperatives have been suggested as one such mechanism. Such cooperatives might also reduce marketing and other costs and allow employees of small employers a choice among health plans. However, if multiple, competitive purchasing cooperatives were created, rather than the single entity envisioned by most managed competition proposals, then problems of risk selection across cooperatives would likely arise and savings in marketing and other costs would diminish.

Taken together, the above steps should provide individuals with new protection from restrictions on their access to health coverage related to their past, present, or expected future health status. However, they are unlikely to eliminate completely the advantages health plans receive from favorable risk selection and the incentives for plans to engage in the selection strategies described in Chapter 5. To further discourage discrimination against higher-risk individuals or "skimming" of lower risk individuals, it will probably be necessary to monitor health plan enrollment and disenrollment patterns and their marketing, management and other strate-

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

gies, although the design and implementation of practical and reasonably effective policies will be a challenge.

Subsidizing Coverage and Controlling Cost Shifting

As noted above, eliminating or significantly reducing medical underwriting and risk segmentation will in the short term do little to make health benefits more affordable for many employers and employees, especially those in low-wage industries. Costs might even increase for some groups and individuals now in low-risk pools, and some low-risk individuals might avoid buying insurance until they thought they needed it.

In the absence of some financial assistance to some employees or employers or both, access to health benefits is not likely to improve. The committee therefore concludes that some public subsidies are necessary to extend coverage to more workers and their families. The policy dilemma this creates in the current fiscal environment is discussed further below.

Several committee members also argue that steps need to be taken to ensure that governments, very large employers, and network health plans do not command excessive discounts from the fees charged by health care providers, thereby leading the latter to offset losses by shifting costs to others. Further, they argue that self-insured employers should be subject to hospital surcharges and other schemes to fund care for the uninsured or to maintain special risk pools for high-risk individuals. Proponents of this approach generally concede that increased individual income taxes or broad-based corporate taxes that affect conventionally insured, self-insured, and uninsured employers are preferable revenue-raising strategies, but they argue that hospital surcharges or similar strategies are better than nothing. These latter approaches would, however, in most if not all cases require further amendments to ERISA.

Other Regulatory Issues

If the above actions were taken, they would go some distance toward making health benefits "portable," alleviating the phenomenon of "job lock," and discouraging efforts by some employers to gain a competitive advantage by restricting or not offering health benefits. However, further action would be necessary—probably through amendments to ERISA—to limit the use of waiting periods and other health plan provisions that may interrupt coverage and thereby discourage labor mobility and permit some continued degree of risk selection by employers and health plans.

ERISA The above findings taken together point to the need for amendments to ERISA or other legislation that would limit medical underwriting,

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
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restrict employer access to sensitive health plan information, reduce barriers to labor mobility, and monitor certain health plan practices. In addition, most members of this committee believe that the system of voluntary employment-based health benefits could be further strengthened by more coherent, uniform, and protective regulatory oversight of employee health benefits, whether they are conventionally insured or self-insured and whether they involve a single employer or a multiple employer benefit plan. The current regulatory vacuum, wherein states cannot regulate employee health benefits and the federal government largely refrains from doing so, needs at a minimum to be filled in selected areas such as plan solvency and data collection protocols. Oversight could be extended either as part of a policy of uniform national regulation or as part of a policy that permits some state discretion within national guidelines or standards.

Defining basic benefits The committee would not favor a proliferation of federal or state mandates for coverage of individual treatments, providers, or sites of care. Such movement could be curtailed by a government commitment to define a basic benefit package developed through processes that weigh the advantages expected from coverage against its costs and risks. Ideally, this package should apply to public and private programs. If the value of the basic benefit package is to be constrained by some kind of cap on its expected actuarial cost, the problems in defining the package become particularly acute, as Oregon's recent experience in trying to set coverage priorities demonstrates. Because the committee does not agree that current methods and definitions are sufficient for this formidable and sensitive task, particularly given the variability in individual patients and the extra decisionmaking burdens imposed by a budget constraint, the research agenda discussed below returns to this issue.

State Experimentation

The committee recognizes that many states would like to take action beyond that described above but are constrained by ERISA. Some state strategies for substantial changes in health care financing and delivery may very well provide useful lessons should federal policymakers be willing to take more substantial steps. To make such experimentation and learning possible, ERISA would need to be amended either to provide authority for specific state experiments or to create a process by which the Department of Labor could grant waivers for experiments meeting certain criteria. In the committee's view, a waiver should be available only for comprehensive state-level experiments intended to extend access to effective health services, control risk selection, and improve the value obtained for health care spending. State experimentation in the development of anti-managed-care

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
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laws (e.g., requirements that physician reviewers for out-of-state utilization management firms be licensed within the state) would not be encouraged.

One major source of opposition to state programs is multistate, self-insured employers, which do not want to be burdened by coverage mandates such as those described in Chapter 3. Statutory criteria for the granting of an ERISA waiver should be considered that would exempt such employers from state-defined benefit packages. If the major objective of a state experiment were to extend and subsidize coverage for the uninsured and underinsured, this kind of exemption would not preclude a requirement that self-insured employers help finance coverage for high-risk, high-cost, or low-income individuals. If the major objective of a state experiment were, however, to establish a statewide health insurance program with no role for the employer except financing (as has been proposed in California), then the exemption for multistate employers described above would stand in the way.

For many members of the committee, state experimentation of the kind described above is preferred only as an alternative to inaction. These members would prefer, on balance, relatively uniform federal policy to define and govern the basic terms on which health care coverage is provided, priced, financed, and administered. For some the basic terms would be those generally proposed by advocates of managed competition; for others the terms would involve a single national health plan.

The Financing Dilemma

Some of the steps described above would involve gains or losses for specific interests (e.g., low-risk small businesses and some or most health insurance companies) but would not make major new demands on federal or state budgets nor impose major new financial obligations on employers or workers overall. Other steps, however, could add significant financial burdens. In particular, the committee realizes that any broad new policy of subsidized voluntary coverage that is substantial enough to induce more employers and employees to purchase insurance will be costly, probably cannot be financed primarily at the state level, and will therefore have to compete with other demands in a federal budget process that is already severely stressed.

New subsidies to employers or employees could be financed by increasing taxes in some fashion, by cutting health care spending, by shifting resources from other areas, or all three. In principle, as described in Chapter 6, costs may be reduced in many ways, for example, by controlling prices, eliminating inappropriate use of services, controlling the introduction and use of new technologies of untested cost-effectiveness, and reducing administrative costs. In practice, most members of the committee be-

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
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lieve it is unrealistic to expect such good performance in these areas that all the costs of extending coverage could be offset. The magnitude of theoretical savings is even disputed. One step several committee members believe is both fair and budgetarily necessary is to limit the amount of an employer's premium contribution that can be excluded from an employee's income for tax purposes. Others oppose the removal of this specific subsidy, particularly as long as other subsidies they view as less socially constructive remain.

These observations notwithstanding, the committee did not have the resources or charge to evaluate financing options in depth. It also saw the issues in this area as so intertwined with the broader health care reform agenda that detailed recommendations would go beyond the committee's charge. The committee, however, acknowledges that the changes discussed in this section—and the next—are unlikely as long as policymakers lack a realistic financing strategy that they feel is feasible politically.

Furthermore, it may be important to consider employer reactions to health care reforms that limited employers' involvement in managing employee health benefits and assigned them only a voluntary or nonvoluntary financing role (e.g., a direct premium contribution or payroll tax). Employers might more vigorously oppose increases in their financial obligations for a health benefits program over which they had no control, and some might withdraw altogether from a voluntary role.

Beyond Voluntary Coverage

The above steps could encourage some employers that do not offer coverage to begin to do so and could help some workers afford coverage that is now beyond their reach. Some employers and workers, however, would still choose not to offer, purchase, or accept health coverage, even if substantial (but not total) subsidies were provided to assist vulnerable small employers and lower-income workers. For a majority of the committee members, therefore, an important finding is that these steps alone—difficult as they may be to achieve in today's environment—cannot significantly extend access or control biased risk selection. To do so, in the view of the majority of the committee, will almost certainly require that some form of compulsory and subsidized coverage be imposed on the employer, the employee, or both. In fact, without universal participation, the problems facing the small-group market could get even worse.

One reason lies in a major limitation of a voluntary system that eliminates medical underwriting. That is, some individuals or groups would choose not to purchase coverage until faced with a health problem. Such behavior is like buying fire insurance while one's house is burning down or life insurance once terminal illness has been diagnosed. This hazard can be controlled by waiting periods and other medical underwriting, but the ma-

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
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jority of this committee believes, on balance, that leaving individuals and families without coverage is not a desirable strategy, especially since low-income groups—absent near-total subsidies—are likely to be overrepresented in the excluded class.

Furthermore, this report has already noted that those without coverage can generally obtain health care once a problem has become an emergency. Such care tends, however, to come late in the course of medical problems, many of which could have been prevented or treated more effectively with more timely care. It also tends not to be coordinated to meet other important but less immediately pressing health care needs. Moreover, because much care for the uninsured is written off as charity service or bad debt, health care providers seek to finance it by shifting the cost to other parties, particularly those who lack market leverage. Although some states have created special schemes (e.g., earmarked taxes on hospital services and regulated hospital rates) to help cover uncompensated care in hospitals and have established limited programs to provide primary and preventive care to the uninsured, this is a second-best strategy in the view of this committee—especially given the vulnerability of these schemes to ERISA challenges. Again, most members of this committee believe that extending health benefits is preferable on grounds of health and equity.

Greatly different approaches are possible to implement compulsory and subsidized coverage, and calls for some form of mandated coverage are embedded in reform proposals that span the political spectrum. Not all would continue a significant role for the employers. For example, some strong advocates of market-oriented strategies urge a move toward mandatory individual purchase of insurance, some government subsidy for lower-income individuals, and an optional and limited role for employers. Others who advocate a strong government role favor a unified social insurance program that would make health coverage near-universal and compulsory and would largely restrict employers to a financing role.

Both these approaches would resolve many of the complexities associated with mandated employer coverage, for example, treatment of different categories of workers (e.g., part-time, seasonal, free-lance) and discontinuity of specific benefits or sources of health care prompted by changes in job status. Depending on its specific features, an individual mandate could make universal the problems of risk selection now found in the individual purchase of insurance or it could attempt to control them through the kinds of features described in the preceding section. A unified national system following the Canadian model would eliminate risk selection by eliminating choice among health plans (but not choice among individual practitioners or providers). A national nonemployment-based program that allowed for choice among health plans would, however, require some mechanisms for controlling or compensating for selection.

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

Among the proposals that continue employment-based health benefits on some kind of mandated basis, specific approaches vary. Some would require employers to offer health benefits. Others would offer employers the option of providing coverage or contributing to some kind of public or quasi-public insurance program. Employer-based proposals vary in their attention to expanded coverage for those without a connection to the workplace or with a limited or episodic connection.

The primary appeal of the proposals that provide a significant role for employment-based health benefits is that they would continue a familiar structure that is, in general, viewed favorably by most Americans. This structure provides many employees with an accessible source of information and assistance in making health plan choices and resolving problems. It encourages employer interest in the link between health care and worker productivity and well-being and the link between health spending and health outcomes.

The major criticisms of employer mandates are that they would (1) impose too heavy an economic burden on businesses, particularly smaller businesses, (2) still leave uncovered many part-time, seasonal, or free-lance workers and their family members, (3) generally leave untouched the problems of complexity and discontinuity in specific benefits and sources of care that now arise during changes in individual job status, and (4) substitute the heavy hand of government regulation for the more efficient operation of competitive markets. An additional criticism is directed at one particular form of employer mandate, the so-called ''play or pay" proposal, which would give employers the choice of providing health coverage or paying a fixed amount (generally between 5 and 9 percent of payroll) to cover their employees under a public program. This "pay" feature would allow employers to cap their liability for health benefits. Depending on the size of the payroll contribution and other specific policy decisions, it could, however, leave the public program vulnerable to adverse selection and financing shortfalls if employers with more healthy employees choose to play (i.e., provide benefits) and employers with less healthy employees choose to pay (i.e., let the public program take over).

Again, this committee does not take a specific position about broad options for health care reform. A form of mandatory employment-based health benefits is not the only option for extending coverage to more workers and their families, and committee members vary in their views about the feasibility and desirability of this option compared with others. This committee does, however, agree that the strengths of the current system should be appreciated and the potential for preserving these strengths while reducing the system's weaknesses should be thoughtfully considered.

Although the combination of the steps described in this and the preceding section would address important weaknesses in the current system, they

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

would do nothing to control the rate of increase in health care spending or better ensure the value received in return for such spending. Committee members have quite different views on what cost containment strategies show potential for being effective, equitable, and compatible with good quality care and on whether these strategies should include an important role for employers. Because the committee could not undertake an evaluation of the cost containment potential of the many proposals for fundamental health care reform, this report must remain silent on a central issue in the debate over reform. As policymakers and others make judgments and define policies to influence health care costs, they should be guided by informed understanding of the systemic factors behind rapidly rising expenditures and a realistic sense that their proposed reforms can affect at least some of these factors and give the nation more confidence in the value received for its health care spending.

Facing problems and trade-offs squarely will be an immense challenge for the policy process. Data analysis is helpful but limited and, in any case, not conclusive given that powerful interests and values are at stake. The nation's inability to decide whether access to basic health care and medical expense protection is a collective obligation or a private responsibility encourages impasse rather than action and rhetoric rather than reasoned problem solving. Surveys indicate considerable public misunderstanding of health care cost and access problems, and this misunderstanding could be a significant obstacle to change if not successfully addressed by a careful public education strategy. These constraints are reinforced by the oppressive persistence of large federal budget deficits, slow economic growth, and the view that effective cost controls must precede expanded access. The committee grants these difficulties, but it is, in general, a group of optimists who believe that this nation's policymakers and its citizens have met equal challenges in the past and can do so again.

A FEW COMMENTS ON PRACTICAL AND TECHNICAL CHALLENGES

As noted early in this chapter, the committee's findings and recommendations do not constitute a blueprint for reform but are rather a statement of some basic steps that appear necessary if employment-based health benefits are to play a more constructive social role. However, to be helpful to those not already involved in the "nuts and bolts" of drafting specific legislation, this section lists some practical questions that may need to be faced by state and federal policymakers and those who seek to advise or influence them.

For any major changes, drafting specific legislative language and implementing regulations require that a great array of technical issues be resolved and matched to the objectives and scope of a particular proposal. Table 7.3

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
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TABLE 7.3 Examples of Practical and Technical Issues in Drafting State or Federal Legislation and Regulations to Implement Major Changes in Employment-Based Health Benefits

Definitions

• What is the definition of an employer of record for part-time, seasonal, temporary workers? of workers with multiple jobs? of workers under age 65 who have retired from another job that provides post-retirement health benefits?

• Should employers below a specific size (e.g., 500 lives) or employers operating in only one state be subject to state insurance regulation even if larger and multistate employers are not?

• How are employer responsibilities for covering family members to be allocated when both spouses work and have similar or quite different coverage available?

• How should employer fiduciary responsibilities be defined with respect to plan solvency? adequacy of coverage? continuity of coverage for specific services or conditions? mandated contributions to state reinsurance or high-risk pools?

Underwritinga

• Are waiting periods permissible before newly hired employees and their dependents become eligible for coverage?

• If the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 for continued benefits to certain former employees and dependents are generally retained, should former employees be required to accept coverage if it is available when they accept a new job?

• Should employers be permitted to adopt restrictions on coverage for a certain condition after an employee has developed that condition?

Premium Contribution

• Should a minimum contribution level be established for conventionally insured or self-insured employers? How should it relate to any public subsidy available for either the employer or the employee?

• Should the employer contribution be the same for the employee and covered dependents? Should it vary by family size? by individual or family income?

• What will be the basis for determining any minimum contribution (e.g., local, state, regional, or national medical care costs)?

• Should a cap on administrative costs for individual health plans be established?

• Should all or some of the employer contribution be taxed as income to the employee? If the current tax subsidy is capped, should the cap be expressed as a percentage of premium, a fixed dollar amount, or some portion of the cheapest plan's premium?

Benefit Design

• Should a basic benefit package be established? or a minimum and a standard package? If so, how?

• Should deductibles and coinsurance rates be higher or lower than they generally are now or about the same?

• What special characteristics of group or network health plans must be considered (e.g., cost sharing and coverage for in-network versus out-of-network care)? Should closed panel plans (only in-network coverage for nonemergency care) be more or less strongly encouraged?

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
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Data Collection and Outcomes Measurement

• Should uniform standards for data collection be defined for insured and self-insured health plans'? for determining health outcomes?

• If employer access to claims and related information is restricted, is monitoring of compliance feasible? How will employee privacy be protected as electronic storage and transmission of medical records become commonplace?

Relationship to Public Programs

• Should coverage for employees with incomes that would otherwise make them eligible for Medicaid coverage be linked to the employer or to Medicaid? Can coverage responsibilities be shared?

• Should self-insured employers be exempt from comprehensive state programs to restructure the health system and extend health benefits for most residents?

a This assumes that many underwriting practices are eliminated, as described in the findings presented in Table 7.2.

lists a selection of these issues or questions as background for those not already immersed in the intricacies of proposal drafting.

Definitions or rules may be easy to draft for the great majority of people or situations to be covered by a proposal. For a minority of situations, rules may be highly contentious or their consequences uncertain. One such question involves coverage of domestic partners. A question that is almost as contentious and even more difficult technically involves how to allocate coverage responsibilities for families with children and both spouses working.

The committee has already noted a number of areas in which amendments to ERISA would be helpful. With respect to Table 7.2, the committee further notes that ERISA is silent on most of these questions and yet precludes states from answering them. As states grapple with problems that have immediate and visible ramifications for their budgets and their citizens, this situation will become increasingly unsatisfactory.

AGENDA FOR RESEARCH AND EVALUATION

Implied or stated in the committee's findings are several important research questions, which are listed below. Some are already the subject of much attention, whereas others have, as yet, been little emphasized. Although not singled out below, other IOM reports (IOM 1989, 1990a, 1990b, 1992a) have identified other important priorities including, in particular, the need for continued research on (1) reliable and valid measurement of health status and well-being at both the individual and the aggregate level, (2) evaluation of the relative effectiveness and costliness of alternative strategies for

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
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treating medical problems, and (3) development of clinical research strategies that better identify the effectiveness of services under real-world conditions, not just in highly controlled clinical trials. Progress in these areas will support research and policy in most if not all of the following areas.

Methodologies for Risk Adjusting Payments to Health Plans

A first priority is to continue public and private efforts to develop, refine, and pilot test risk measurement and payment adjustment techniques. These tests need to reflect the real-world environments in which the methods would be applied (e.g., government programs and small-group purchasing cooperatives). Committee members disagree about how good a risk adjuster must be (that is, how much variation in plan costs it can explain or predict), but all believe that existing techniques are insufficient. Some of the more robust adjusters (e.g., past use of health services and certain health status measures) may create undesirable incentives for health plans or be impractical to implement on a routine basis. Further refinements in these approaches may mitigate some of these problems. In general, a uniform approach to data collection and analysis is needed that meets actuarial and statistical standards and also serves quality improvement purposes. Methods that purport to risk adjust with a proprietary "black box" would not qualify unless their models were revealed.

Consequences of Underwriting Reforms

Plans should be developed to monitor the consequences of state or national reform in the small-group market and to simulate possible consequences of alternative reforms to guide eventual policy decisions. Underwriting reforms and community rating policies should not inadvertently undermine those insurers who have been willing to insure higher-risk individuals and who thereby have accumulated a risk pool that is more expensive than the community average. Although the reform proposals of the National Association of Insurance Commissioners are intended to deal with this problem, policymakers may benefit from monitoring of their adoption to detect possible unintended and unwanted consequences of particular policies.

In addition, in-depth case studies of those few communities where some form of community rating is still significant might be useful. One objective would be to examine the conditions under which this practice has survived despite the presence of competing health plans and the absence of risk adjusted employer payments. Another would be to assess, if a plausible analytic strategy could be devised, whether overall health care costs and costs for low-risk and high-risk individuals or groups would have been lower or higher over the long term had community rating not existed.

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
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Basic Benefits

As noted in the preceding section, the committee endorses more research and analysis to support the definition of basic, standard, or minimum benefits. Such standardization, which is a feature of most health care reform proposals, could help discourage risk selection, reduce certain kinds of complexity, and better relate the cost of care to its value. At this time, however, proposals for reform vary substantially in the processes explicitly or implicitly envisioned for defining basic benefits, and different conceptualizations of the term are likewise evident. Some proposals emphasize preventive and primary care services that have relatively low unit prices and simple technology. Other discussions suggest that a basic benefit package is an "urgent care" package aimed primarily at the kinds of illness or injury that produce significant expenditures (a few days of hospital care) but not necessarily catastrophic expenditures (more than 30 or 60 days). Some proposals appear to start with the relatively broad range of services now covered by most health plans but then apply notions of appropriateness (medical benefit exceeds medical risk), relative cost-effectiveness (coverage to some cutoff point), importance as perceived by patients, potential patients, or physicians, and decency (lack of coverage would offend human decency).

These issues are complex and could benefit from a careful and structured effort to outline and analyze the conceptual issues and the procedural issues raised by alternative approaches. The dimensions of the issues include consumer and patient preferences and capacities for decisionmaking; practitioner attitudes, behaviors, and capacities for decisionmaking; the state of technology assessment and the knowledge base concerning effectiveness and outcomes, including measures of health status; cost-effectiveness analysis; the state of the art in actuarial modeling to project the implications of alternative benefit packages; ethical perspectives; legal considerations; and administrative feasibility. Therefore, another research priority is an assessment of the evidence base and methodologies specified or implied by different proposals for standardizing health plan benefits, their potential to limit or exacerbate biased risk selection, and their likely impact on health care costs, health outcomes, and patient/consumer satisfaction.

Employer Assistance with Employee Decisionmaking and Problem Resolution

Employers can provide useful assistance to employees in making decisions among health plans, understanding and conforming to their requirements, and resolving problems. In assessing future policy choices, it would be helpful to know the extent to which employers do, in fact, assist employ-

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

ees in ways that might be difficult to recreate under other models (such as those that now exist for individual purchasers of health insurance, including Medicare supplemental benefits). Such models include consumer watchdog groups and senior citizen advisory services. Whether the purchasing cooperatives suggested for small employers could act as an advocate for employees needs further exploration. In general, the differences between the capacities of different-sized employers to manage benefits have not been adequately explored.

Continuity of Care

Individual choice of health care practitioner is becoming an increasingly important issue with respect to limited groups or networks of providers that may encourage continuity of care within the network but may disrupt care when individuals must move from one network to another. Such disruption may occur when a job change is made and the new and former employers offer different networks or when the same employer adds and drops networks over time. The incidence and clinical consequences of such disruption need investigation, particularly for the chronically ill and others at higher-risk of problems.

Assuming that discontinuity in the patient-physician relationship does create significant problems for some patients, mechanisms to avoid or compensate for such problems also need to be tested. The open-ended HMO or point-of-service plan is one mechanism that might allow continuation of patient-physician relationships across separate networks, but the extent to which such plans actually facilitate continuity of care is untested. It is reasonable to expect that such systems might affect low-and high-income individuals differently and that their impacts would vary depending on the required extra cost sharing, particularly the maximum out-of-pocket spending.

Another approach that might foster continuity of care is included in some reform proposals that would establish a certification system for health plans and require that employers offer all approved plans to their employees. If employers may offer only a subset of approved plans, then some continuity of care problems would likely continue. The amount of discretion that employers might retain concerning their health benefit program under the "offer all" approach is not clear.

Currently, when employers drop and add network health plans, they may work with the plans to ease the transition for some patients, such as those who are pregnant and whose obstetrician is not part of the new network. Such arrangements would be considerably more difficult to arrange and maintain for those with long-term, expensive problems, but research on the design and financing of such arrangements should be considered.

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
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FINAL THOUGHTS

As noted throughout this report, the United States is unique in its reliance on employers to provide voluntarily health benefits for workers and their family members. This constantly evolving arrangement has its pluses and minuses, although the limitations of the system are becoming considerably more visible and worrisome. In particular, the dynamics of risk segmentation, the potential for increased discrimination, the persistence of millions of uncovered individuals through economic upturns and downturns alike, and the increasing complexity generated by employer—and government—cost containment efforts have led to many proposals for health care reform. Some retain a central role for employment-based health benefits— voluntary or mandatory—whereas others eliminate them (or relegate them to a minor position) in favor of a government health plan or a market for individually purchased insurance. As the details of specific proposals are emerging and being subjected to increasing critique and analysis, the arguments about their particular characteristics, expected consequences, and apparent trade-offs are growing more specific.

Do employment-based health benefits offer sufficient "value added" that reforms in the U.S. health care system should continue—indeed mandate—them even if some important limitations of the system cannot be fully corrected by such reforms? Each member of the committee has a somewhat different answer to this question, one affected to varying degrees by the practical reality that this system is what is in place and is familiar and valuable to most Americans. Nonetheless, most foresee a continued deterioration in the quality and scope of health coverage unless major steps are taken to reduce or correct serious weaknesses in the system. Most believe it unlikely that more small employers could voluntarily and independently provide the coverage and assistance offered by large employers.

Overall, policymakers and reform proponents of all stripes may both overstate and understate the advantages and disadvantages of current arrangements, a circumstance made easy by the diversity of these arrangements. Despite the diversity of its views on specific directions for health care reform and the role of the employer, the committee would not like to see lost the assistance that employers can bring to employees facing problems with their health coverage. Because neither a single national system nor a competitive market based on individual (not employer) choice would be perfect, employers might—given either scheme—very well see advantages in a new kind of "employee assistance program" or fringe benefit that would provide employees with assistance and explanation of their health plan coverage or help in resolving problems with denied claims, bureaucratic inertia, or whatever similar difficulties a reformed system might present.

Furthermore, the committee would not like to see employers uncon-

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
×

cerned about the link between health coverage, health status, and worker well-being and uninterested in efforts to improve assessments of the cost-effectiveness of specific medical services and health care providers. Because workplace and community health promotion programs, local health care initiatives and institutions, and other health-related activities have attracted employees' and employers' support for reasons beyond any specific tie to their health benefit programs, continued support can be expected and fostered.

Given the creativity shown by both public and private sectors in the past and the considerable accomplishments of employment-based health benefits, there is reason to be optimistic that decisionmakers—if they can agree on a basic framework for reform—can find a positive role for employers. That role may be larger or smaller than it is today, but in either case it should be designed to support the country's broad objective of securing broader and more equitable access to more appropriate health care at a more reasonable cost.

SUPPLEMENTARY STATEMENT OF A COMMITTEE MEMBER

John K. Roberts, Jr.

Health insurance is based on the concept of risk sharing. If individuals are allowed to wait until they get sick or injured to purchase insurance, then there is no risk sharing and the insurance mechanism breaks down. This is a concern, particularly in the individual and small group markets, where the insurance buying decision is more likely to be based on current needs for medical care. Individual underwriting and pre-existing condition limitations serve as incentives for individuals to purchase insurance while they are still healthy. If these tools are to be eliminated, they must be replaced by other means of assuring a broad spread of risk. Further, the result of the recommendations as outlined would be to increase the cost of insurance protection for many. This, in turn, will likely result in fewer people—not more—being able to afford insurance coverage, producing a result exactly opposite that intended by the recommendations.

Suggested Citation:"7 FINDINGS AND RECOMMENDATIONS." Institute of Medicine. 1993. Employment and Health Benefits: A Connection at Risk. Washington, DC: The National Academies Press. doi: 10.17226/2044.
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Employment and Health Benefits: A Connection at Risk Get This Book
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The United States is unique among economically advanced nations in its reliance on employers to provide health benefits voluntarily for workers and their families. Although it is well known that this system fails to reach millions of these individuals as well as others who have no connection to the work place, the system has other weaknesses. It also has many advantages.

Because most proposals for health care reform assume some continued role for employers, this book makes an important contribution by describing the strength and limitations of the current system of employment-based health benefits. It provides the data and analysis needed to understand the historical, social, and economic dynamics that have shaped present-day arrangements and outlines what might be done to overcome some of the access, value, and equity problems associated with current employer, insurer, and government policies and practices.

Health insurance terminology is often perplexing, and this volume defines essential concepts clearly and carefully. Using an array of primary sources, it provides a store of information on who is covered for what services at what costs, on how programs vary by employer size and industry, and on what governments do—and do not do—to oversee employment-based health programs.

A case study adapted from real organizations' experiences illustrates some of the practical challenges in designing, managing, and revising benefit programs. The sometimes unintended and unwanted consequences of employer practices for workers and health care providers are explored.

Understanding the concepts of risk, biased risk selection, and risk segmentation is fundamental to sound health care reform. This volume thoroughly examines these key concepts and how they complicate efforts to achieve efficiency and equity in health coverage and health care.

With health care reform at the forefront of public attention, this volume will be important to policymakers and regulators, employee benefit managers and other executives, trade associations, and decisionmakers in the health insurance industry, as well as analysts, researchers, and students of health policy.

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