Employer-Based Health Insurance

With the costs of health insurance constantly outstripping the inflation rate, U.S. businesses are having a hard time providing their workers with health insurance. The average company has seen employer health insurance costs more than double as a share of its total wage bill in the last two decades. The situation has been even more devastating for firms with older or less healthy workers, firms located in high-cost areas, smaller firms, and firms with large numbers of retirees covered by company health plans. The demise of community rating and segmentation of insurance risk groups is evident in the significantly different health care costs experienced by firms, much of which is largely beyond their control in the short term. The large variation in firm costs, as well as the difficulty for some firms in obtaining or retaining health coverage, contributes to the continuing erosion of employer-provided health insurance. Today, some businesses are eliminating health insurance for workers with potentially expensive medical conditions; shifting costs to employees by raising deductibles and copayments; cutting back retiree benefits; and, in some cases, eliminating coverage entirely. As Congress considers health care reform proposals, the huge variation in health care costs become a major point of contention. In GAO's view, unless universal access is a component of health care reform, it is not clear that reforms designed to help those firms with particularly high health care costs will generate any real improvement in access to care.

GAO found that: (1) from 1987 to 1990, business health spending has grown at a rate of 12 percent annually, or more than twice the rate of inflation, and health insurance premiums grew an average of 16 percent annually, increasing from $2000 to $3,600 per employee; (2) increases in business health expenditures and declines in employees' real wages have made health benefits a substitute for cash wages; (3) in 1991, 8 percent of firms paid less than $2000 per covered employee, while 13 percent paid more than $5000 per employee; (4) medium and large firms' average health costs total 10.8 percent of their payrolls; (5) fragmentations in the insurance market have caused businesses to acquire self-insurance plans, and over half of U.S. employees are covered by those plans; (6) characteristics including work-force health-risk attributes, scope and financing of the benefit plan, the firms size, location, and line of business explain variations in firms' high health costs; (7) firms requiring lower employee contributions, offering more supplemental benefits, and having more married and older employees have higher health costs; (8) small firms are subject to higher health insurance rates because of added regulatory and premium tax costs, higher health benefit tax rates, a lack of bargaining power, and higher premium increase rates; (9) geographic location has a significant impact on business health benefits costs, and health care markets are influenced by personal income, available health care resources, and the population's health status; (10) firms attempt to reduce costs by changing benefit plans, which includes shifting more cost to employees, cost-sharing incentives, self-insurance, cutbacks in retiree benefits, and eliminating coverage; and (12) options for firms unwilling or unable to change their benefit plans include limiting coverage, hiring lower-risk employees, replacing older workers, replacing young female workers, and replacing full-time employees with part-time contingent workers.