Insurance Markets Health Benefit Costs: Employers Share the Pain TRENDS&ANALYSIS July 2003 Introduction health care costs. These employers are three times California employers, like those throughout the as likely as large employers (1,000ϩ) to say their United States, define the health care choices for health care costs are totally out of control. most of the insured population. In recent years, Table 1. Employer Assessment of the Inflation however, soaring health care costs have forced of their Health Benefit Costs employers across the state to make major changes EMPLOYERS I N F L AT I O N California, by Size in their health benefit plans. What will these LEVEL U.S. All Small Medium Large changes mean to California? Two surveys — one Completely Under Control 6% 6% 5% 6% 6% of California employers and one of U.S. employers Somewhat — conducted by Harris Interactive Inc.® on behalf Under Control 46% 41% 27% 38% 48% of the California HealthCare Foundation — show Somewhat Out of Control 35% 41% 47% 38% 39% how employers are attempting to contain costs Totally and suggest some implications for employees. Out of Control 13% 12% 21% 16% 7% This report highlights key findings from this research and compares California’s experience Given these findings, it is no surprise that Cali- with the country as a whole. fornia employers are focused on cost-containment. Asked to rank the priority of three health-policy A Sense of Urgency goals, most California employers selected cost California employers expect health benefit costs control as their top choice (59 percent); almost to increase 14 percent on average in 2003; an over- one-quarter ranked improving patient safety and whelming number (88 percent) agree that health the quality of care as the highest priority, and just care premiums will increase at double-digit rates one in seven employers ranked reducing the for at least the next three years. Against this bleak number of those without health insurance as the backdrop, 53 percent of California employers top priority (see Figure 1). offering health insurance describe their health benefit costs as “out of control,” a slightly higher proportion than employers nationwide (48 percent) (see Table 1). California employers with fewer than 100 employees are particularly anxious about their Figure 1. Ranking of Priority Among Three Health What’s Next Care Goals by California Employers With costs expected to continue to rise, California Priority employers plan additional cost-sharing measures in First Second Third the next two years. Two-thirds are likely to increase Controlling the Costs of Health Care 59% 24% 14% employees’ share of costs at the point of service (see Table 3). Most employers also expect to increase premium Improving Patient Safety and the Quality of Care 22% 49% 27% contributions for dependents as well as employee-only coverage. Nearly three in ten will reduce the scope of Reducing the 15% 26% 58% Number of Uninsured covered benefits, and one-quarter plan to move toward 0% 20% 40% 60% 80% 100% a contingent workforce (part-time, temporary) without health benefits. However, less than ten percent plan to drop health coverage altogether. Overall, California The Response So Far employers’ planned response is similar to employers When health insurance premiums began to escalate nationally — although California employers are in the late 1990s, the tight labor market inhibited somewhat less likely to plan premium contribution employers from passing along these costs to their increases for employee-only coverage and are employees. But as unemployment has grown and substantially less likely to plan premium contribution corporate profits have fallen, employers across the nation increases for dependent coverage. and in California have begun to shift a greater share Contrary to popular perception, small employers in of health care expenses to employees. In the past year, California are much less likely than medium- and 57 percent of employers nationally and 44 percent of large-sized employers to have shifted costs to their California employers increased employee cost-sharing, employees in the past year, and are less likely to plan for example, charged more for each doctor visit or future increases in employees’ share of costs and prescription filled (see Table 2). In addition, 17 percent premiums. In part, this may be due to health plan- of California and U.S. firms reduced the range of benefits covered by their health plans. Table 2. Employers Who Made Each Health Benefit Change in the Past Year EMPLOYERS California, by Size BENEFIT CHANGE U.S. All Small Medium Large Increased the amount of employee cost sharing 57% 44% 36% 48% 46% Increased the premium contribution for employee-only coverage N/A 39% 29% 46% 41% Increased the premium contribution for dependent coverage N/A 31% 15% 39% 35% Reduced the scope of covered benefits 17% 17% 14% 21% 16% Note: Data on premium contribution increases is not comparable between the U.S. and California because the U.S. survey did not collect premium contribution data separately for employee-only and dependent coverage. 2 | C ALIFORNIA H EALTH C ARE F OUNDATION Table 3. Employers Likely to Make Each Benefit Change in the Next Two Years EMPLOYERS California, by Size BENEFIT CHANGE U.S. All Small Medium Large Increased the premium contribution for employee-only coverage 73% 54% 33% 58% 60% Increased the premium contribution for dependent coverage 68% 62% 48% 63% 69% Increased the amount of employee cost-sharing 67% 66% 42% 70% 74% Significantly restrict or reduce the prescription drug benefit 35% 29% 18% 23% 36% Decrease the scope of covered benefits 29% 28% 21% 25% 31% Employ more contract, temp, or part-time workers and not provide them with coverage 30% 25% 21% 25% 26% Drop some or all of coverage for employees’ dependents 7% 9% 8% 10% 9% Drop some or all of coverage for employees 7% 9% 9% 10% 8% imposed minimum participation requirements. These Furthermore, unused dollars in an employee’s HRA rules protect health plans from adverse selection (the account may be rolled over to the following year — a risk that a disproportionate share of sicker employees big improvement on FSAs. However, there is a catch. will enroll in a given plan) by requiring the majority If employees’ expenses exceed their HRA account (usually 75 percent) of a policyholder’s employees to balance, they are on the hook for 100 percent of their participate in the health plan (or have insurance from medical expenses until they reach their annual another source). The need to keep take-up rates high deductible. Thus, employees have incentives to spend inhibits many small firms’ ability to tamper with their their own health care dollars wisely. health benefits; if too many employees opt out of the Overall, a tiny fraction of California employers (two employer-sponsored plan in response to cost increases, percent) currently offer such plans. And in spite of the entire firm could lose its coverage. tremendous attention in the media and policy arenas, Although employers are shifting more costs to their only ten percent of employers not currently offering an employees, few have radically restructured their health HRA plan say they are likely to offer this benefit in the benefit plans. That may change if one much-discussed next two years. new program, health reimbursement arrangements Nor are many employers embracing other strategies to (HRAs) catch on. Typically employers couple an HRA encourage more cost-conscious choices among their with a lower-premium health plan that requires employ- employees. Only 28 percent of employers currently offer ees to meet high deductibles. The HRA works much a defined contribution plan, in which the employer’s like a traditional flexible spending account (FSA), premium contribution is fixed, either to a specific dollar reimbursing employees for out-of-pocket medical amount or to the lowest cost plan offered, and the expenses through a tax-free account. One key difference employee pays the difference between the cost of their is that a flexible spending account is funded by employee chosen health plan and the employers’ contribution. dollars, while an HRA is funded by employer dollars. Health Benefit Costs: Employers Share the Pain | 3 Implications for Workers Conclusion Many consumer advocates and policymakers fear that Like their national counterparts, California employers higher out-of-pocket costs will cause consumers to go are grappling with increasing health care cost inflation without needed medical care. Employers share these and expect those costs to continue to rise. Employers concerns. Solid majorities of California employers agree in the state have responded by increasing employees’ that increasing the cost of health services to consumers share of out-of-pocket expenses and premium will cause some to forgo needed care and threaten the contributions — though these increases have been less health of chronically ill workers. California employers pervasive in California than elsewhere. Despite the are somewhat more concerned about these effects than gloomy outlook on costs, only a handful of employers are employers nationally (see Table 4). are currently offering “consumer-directed” health plans such as HRAs. (A Trends and Analysis report on Employers balance these concerns with the belief that consumer-directed health plans will be available on when employees pick up more of their health care www.chcf.org in August.) Fewer than ten percent are expense, they will spend more carefully on health care considering dropping coverage in next two years. services and reduce unnecessary use of physician services and prescription medications. Fifty-two percent of Many employers are caught between the need to California employers agree with the statement, “Health control health benefit costs and a desire to protect care costs will never be controlled unless consumers their employees from large medical bills. However, are forced to pay more out of their own pocket at the many agree that greater cost sharing will reduce point of care.” Thus, increased cost-sharing is seen as a necessary care and negatively affect employees with business necessity, and is likely to become a fixture of chronic conditions. Such outcomes should concern employer-sponsored health plans. public policymakers as well. Table 4. Employers that Strongly or Somewhat Agree Methodology with Potential Effects of Higher Cost Sharing at the Point of Care Results for U.S. employers are based on a 20-minute EMPLOYERS EFFECTS OF telephone survey with a nationally representative INCREASED COST SHARING U.S CA sample of 301 employers conducted between May 15 Positive Effects: Force consumers to spend more wisely on and June 5, 2002. The sample consisted of U.S. health care services 82% 83% companies with five or more employees, excluding SIC Reduce unnecessary doctors visits 78% 77% Codes 80 (health services), 82 (education services), and Reduce unnecessary prescriptions 70% 65% 91–99 (public administration). The sample was stratified Harmful Effects: Cause consumers to forgo needed medical care 64% 70% by employee size to ensure proper representation of Have a negative impact on the health of each size company in the United States. employees with chronic conditions 61% 69% Reduce the productivity of workers 34% 26% California data are based on a 20-minute telephone survey of 301 employers conducted between November 14 and December 24, 2002. The sample 4 | Health Benefit Costs: Employers Share the Pain consisted of companies with five or more employees, Future editions will identify trends in California’s excluding SIC Code 91-99 (public administration). insurance markets, analyze regulatory and policy For reporting purposes, employers were categorized issues, and provide industry updates. Analyses into three employee-size categories: Small (5–99 will be posted as they become available at the employees); medium (100–999 employees); and large California HealthCare Foundation’s Web site at (1000 or more employees). The data were weighted by www.chcf.org. employee size to reflect the distribution of each size The California HealthCare Foundation’s program company in California. area on Health Insurance Markets and the Uninsured seeks to improve the functioning of California’s health insurance markets, particularly F O R M O R E I N F O R M AT I O N the small group and individual markets, and to expand coverage to the uninsured. For information Additional data and information is available at on the work of Health Insurance Markets and the www.chcf.org. A companion Trends and Analysis report, Uninsured, contact us at insurance@chcf.org. titled “Ready or Not: Consumers Face New Health Insurance Choices,” focuses on the impact of health benefit trends on consumers and is also available at www.chcf.org. CALIFORNIA HEALTHCARE FOUNDATION | 476 Ninth Street, Oakland, CA 94607 | tel: 510.238.1040 | fax: 510.238.1388 | www.chcf.org