Employment and Health Benefits

A Connection at Risk

Marilyn J. Field and Harold T. Shapiro, Editors

Committee on Employer-Based Health Benefits

Division of Health Care Services

INSTITUTE OF MEDICINE

NATIONAL ACADEMY PRESS
Washington, D.C. 1993



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Employment and Health Benefits: A Connection at Risk Employment and Health Benefits A Connection at Risk Marilyn J. Field and Harold T. Shapiro, Editors Committee on Employer-Based Health Benefits Division of Health Care Services INSTITUTE OF MEDICINE NATIONAL ACADEMY PRESS Washington, D.C. 1993

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Employment and Health Benefits: A Connection at Risk NATIONAL ACADEMY PRESS 2101 Constitution Avenue, N.W. Washington, D.C. 20418 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This report has been reviewed by a group other than the authors according to procedures approved by a Report Review Committee consisting of members of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The Institute of Medicine was chartered in 1970 by the National Academy of Sciences to enlist distinguished members of the appropriate professions in the examination of policy matters pertaining to the health of the public. In this, the Institute acts under both the Academy’s 1863 congressional charter responsibility to be an adviser to the federal government and its own initiative in identifying issues of medical care, research, and education. Support for this project was provided by the Agency for Health Care Policy and Research, U.S. Department of Health and Human Services, under Contract No. 282-91-0020. The views presented are those of the Institute of Medicine Committee on Employer-Based Health Benefits and are not necessarily those of the funding organization. Library of Congress Cataloging-in-Publication Data Institute of Medicine (U.S.). Committee on Employer-Based Health Benefits. Employment and health benefits : a connection at risk / Committee on Employer-Based Health Benefits, Division of Health Care Services, Institute of Medicine ; Marilyn J. Field and Harold T. Shapiro, editors. p. cm. Includes bibliographical references and index. ISBN 0-309-04827-3 1. Insurance, Health—United States. 2. Voluntary employees’ beneficiary associations—United States. I. Field, Marilyn J. (Marilyn Jane) II. Shapiro, Harold T., 1935- . III. Title. HG9396.I57 1993 331.25’5—dc20 92-42468 CIP Copyright 1993 by the National Academy of Sciences. All rights reserved. No part of this book may be reproduced by any mechanical, photographic, or electronic process, or in the form of a phonographic recording, nor may it be stored in a retrieval system, transmitted, or otherwise copied for public or private use, without written permission from the publisher, except for the purpose of official use by the U.S. Government. The serpent has been a symbol of long life, healing, and knowledge among almost all cultures and religions since the beginning of recorded history. The image adopted as a logo-type by the Institute of Medicine is based on a relief carving from ancient Greece, now held by the Staatlichemuseen in Berlin. Printed in the United States of America

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Employment and Health Benefits: A Connection at Risk COMMITTEE ON EMPLOYER-BASED HEALTH BENEFITS HAROLD T. SHAPIRO,* Chair, President, Princeton University, Princeton, New Jersey HARRY P. CAIN, II, Senior Vice President, Federal Programs, Blue Cross and Blue Shield Association, Washington, D.C. DAVID E. EDWARDS, Director, Benefits, Eastman Kodak Company, Rochester, New York ALLEN FEEZOR, Chief Deputy Commissioner of Insurance, North Carolina Department of Insurance, Raleigh, North Carolina W.H. KROME GEORGE, Chairman and CEO (retired), Aluminum Company of America, Sewickey, Pennsylvania WILLIAM S. HOFFMAN, Director, Social Security Department, International Union, United Automobile, Aerospace & Agricultural Implement Workers of America (UAW), Detroit, Michigan STANLEY B. JONES,* Independent Consultant, Shepardstown, West Virginia NICOLE LURIE, Associate Professor of Medicine and Public Health, Department of Medicine, Hennepin County Medical Center and the University of Minnesota, Minneapolis, Minnesota ALAN R. NELSON,* Executive Vice President, American Society of Internal Medicine, Washington, D.C. JOHN K. ROBERTS, JR., President and CEO, Pan American Life Insurance Company, New Orleans, Louisiana DALLAS L. SALISBURY, President, Employee Benefit Research Institute, Washington, D.C. K. PETER SCHMIDT, Partner, Arnold and Porter, Washington, D.C. GEORGE F. SHELDON, Professor and Chair, Department of Surgery, University of North Carolina, School of Medicine, Chapel Hill, North Carolina KENNETH E. THORPE, Associate Professor, Department of Health Policy and Administration, University of North Carolina, School of Public Health, Chapel Hill, North Carolina JOAN B. TRAUNER, Principal, Coopers & Lybrand, Actuarial, Benefits and Compensation Consulting Group, San Francisco, California GAIL L. WARDEN,* President and Chief Executive Officer, Henry Ford Health System, Detroit, Michigan *    Institute of Medicine member

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Employment and Health Benefits: A Connection at Risk Study Staff Marilyn J. Field, Study Director Jo Harris-Wehling, Program Officer Donna D. Thompson, Administrative Assistant Karl D. Yordy, Director, Division of Health Care Services

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Employment and Health Benefits: A Connection at Risk Preface The many stunning and continuing achievements of American medicine and biomedical science and technology are widely understood and gratefully appreciated by many people in the United States and abroad. More recently, however, the focus of our attention has shifted—quite appropriately—to a set of equally startling problems that have come to characterize health care finance and delivery in this country. The most important of these complex and interrelated matters surround issues of access (too many Americans no longer have access to basic medical care), issues of value and cost (increasing concern that the value of the care received is not commensurate with its quickly escalating cost), and issues of social policy (how do we wish to share costs between the sick and the well and between the rich and the poor). Also quite sobering is the growing evidence of excess capacity in our inventory of hospital beds and of certain advanced diagnostic and treatment equipment. Moreover, the widely different patterns of medical practice and their widely different resource requirements seem to suggest less than full understanding of the most effective way to deliver health care. Each of these issues is itself a complex mixture of many sub-issues, but there is little question in my mind that it is critical for America to develop private and public policies that not only insure the continued vitality of American medicine and biomedical science and technology, but do so in a manner that addresses—in a fundamental way—our concerns in the area of access, value, cost, and social policy. One important piece of the policy puzzle is this country's system of voluntary employment-based health benefits. This was recognized by the Institute of Medicine's Board on Health Care Services, which began dis-

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Employment and Health Benefits: A Connection at Risk cussing the concept of this study over three years ago. The board was particularly concerned that the current and potential impact on our overall health care system of employer responses to their escalating problems in financing health benefits was not sufficiently appreciated or understood. As a result, the difficulties, for example, of preserving our voluntary employment-based health benefits system as a mechanism for sharing risk across the well and the ill and the rich and the poor often were being underestimated. Moreover, a careful understanding of the benefits and limitations of this voluntary, employment-based system could make a contribution to the current public policy debate on health reform. In late 1990 the Committee on Appropriations of the United States Senate requested that the Agency for Health Care Policy and Research (AHCPR) contract with the Institute of Medicine for a study of voluntary employment-based health insurance. The request noted the severe strains facing this system. It cited double-digit inflation, employer doubts about the value of their increased spending, and deterioration of the employer group as a vehicle for sharing risk. One of the specific requests made by AHCPR was for a research agenda. To oversee the study, the Institute of Medicine formed a committee that included individuals with a broad range of experience in health care delivery, business, union activities, health insurance, law, economics, and health services research and policy. The committee met four times between June 1991 and July 1992. Study activities included a public hearing; a round table discussion with leading consulting and insurer actuaries; a symposium for business and other leaders; two public opinion surveys planned with and sponsored by the Employee Benefit Research Institute; commissioned or committee papers on the legal context of employment-based benefits, the links between financing for patient care and medical education and biomedical research, and the relationship between health care costs and the productivity and competitiveness of American business; an extensive literature review; and consultation with a wide range of policy leaders, researchers, employers, and concerned parties. As this study proceeded, health care reform once again began to emerge as a major public policy issue. Proposals for reform have proliferated and mutated so rapidly that the systematic identification, categorization, and analysis of their basic features has become a mini-industry (see, for example, Blendon and Edwards, 1991; Blue Cross and Blue Shield Association, 1991b; CBO, 1991a; EBRI, 1992b; Association of American Medical Colleges, 1992). The committee, because of its particular mandate, neither joined this new "industry" nor pursued its own special vision for health care reform. The committee chose rather to focus its limited time and resources on certain important characteristics of the current system that had received relatively little in-depth analysis.

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Employment and Health Benefits: A Connection at Risk The committee focused, in particular, on one of the defining characteristics of the U.S. health care finance system—its voluntary employment-based nature—and the particular implications this had for those with health care needs and for the role of public policy, medical care providers, the insurance industry, and other major participants in the health care system. The committee believed that the results of such an examination would be informative and thought-provoking for both those who favor the continuation of a voluntary employment-based health benefit system and those who favor its replacement by other arrangements. Nearly all of the committee agreed on the findings and recommendations presented in Chapter 7. Unlike most National Research Council committees, however, this committee did not reach consensus on some central issues. For example, committee members could not agree on whether employment-based health benefits should be continued or abandoned or whether regulatory or market-based strategies for cost containment were preferable. On such matters the committee and, consequently, its report reflect the fundamental lack of consensus that has characterized the public debate over health care reform. Bringing agreement and commitment out of conflict and ambivalence will be a major challenge for this nation's leaders. Although the committee members hold a wide variety of views on health care reform, it seems quite clear to me that major changes in current arrangements are necessary in order to achieve a more equitable and cost-effective system of health care. It is my own judgment that without major changes our system of voluntary employment-based health benefits will deteriorate further and may collapse. Indeed, as Chair of this effort over the nearly two years of the committee's work, I have—somewhat reluctantly— come to believe that a purely voluntary system cannot sufficiently expand access to health care benefits to retain its social viability as one of the cornerstones of our national health care system. I have also come to believe that all acceptable outcomes in the arena of health care will require that the healthy and the well-off share in the cost of covering the ill and the poor (i.e., reform cannot be fully financed from "waste"). Finally, I believe that additional public policy initiatives (e.g., subsidies, taxes, and regulations) are necessary to ensure that private markets function more effectively for the consumer of health care. These and other associated issues must be thoroughly debated and a national consensus achieved. I hope the content of this report will help all its readers decide many of these issues for themselves. Harold T. Shapiro Chair, Committee on Employer-Based Health Benefits

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Employment and Health Benefits: A Connection at Risk Acknowledgments In preparing this report, the Committee on Employment-Based Health Benefits and the study staff were assisted by many individuals and groups, most of whom we hope we have acknowledged here. Three meetings—a public hearing, a workshop on actuarial issues, and a symposium—sponsored by the committee were particularly useful sources of ideas and insights. Those who participated in these sessions are listed in Appendix C. Many of these individuals also assisted the study in other ways. Stephen Merrill, Lois Perolle, and Daniel Gross of the Academy Industry Program helped in organizing and jointly sponsoring the May 1992 symposium. Initial direction for this study came from a planning group that met in June 1989. The meeting was chaired by Paul O'Neill, CEO of Aluminum Company of America. The other participants (and their affiliations at that time) were Howard Bolnick, Celtic Life Insurance Co.; Helen Darling, Mercer Meidinger and Hanson; Jerome H. Grossman, New England Medical Center Hospitals; Karen Ignagni, AFL-CIO; Stanley Jones, Consolidated Health Care, Inc.; Walter J. McNerney, Northwestern University; Thomas O. Pyle, Harvard Community Health Plan; William R. Roy, Women's Clinic; and Gail Warden, Henry Ford Health Care Corporation. Lynn Etheredge prepared the background paper for that meeting and contributed many more provocative ideas thereafter. Throughout the project we also benefited from the experience and advice of Walter J. McNerney, chair of the Institute of Medicine (IOM) Board on Health Care Services, and other members of the board. Two members of the IOM Council, Joseph Newhouse and Harold Luft, reviewed major sections of the report and provided invaluable critiques. The committee commissioned two papers that provided useful background for this report. Edward Shay prepared an overview of state and

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Employment and Health Benefits: A Connection at Risk federal regulation of employee health benefits (Appendix B), and Ruth Hanft provided an overview of third-party payment issues related to biomedical research and medical education. David Brailar of the Wharton School of the University of Pennsylvania presented research results from that institution's work on health care and American competitiveness. In addition, the Employee Benefit Research Institute (EBRI) graciously offered the committee the opportunity to help draft questions for two of the surveys it periodically conducts using the Gallup Organization. A summary of results is presented in Appendix A. Our collaborators at EBRI were Dallas Salisbury, William Custer, Laura Bos, and Jill Foley. In addition, Janette Hall and other staff at EBRI were excellent sources of information. Beth Fuchs and Janet Kline of the Congressional Research Service also shared information and ideas based on their extensive work on health insurance and related issues. As project officer, Fred Hellinger of the Agency for Health Care Policy and Research (AHCPR) was helpful on many occasions, as was Michael Hagan, also of AHCPR. At the Department of Labor, Richard Hinz and Richard Lindrew helped clarify the intricacies of the Employee Retirement Security Act. Also at the Department of Labor, Jay Meisenheimer and William Wiatrowski helped us with many inquiries about Bureau of Labor Statistics data. Martin Lefkowitz at the U.S. Chamber of Commerce provided similar assistance. Several panel discussions organized by Judith Miller Jones, Karl Polzer, and others at the National Health Policy Forum contributed a variety of important perspectives on problems of insuring employees of small organizations. Others who provided useful insights from their experience or research included Ellen Goldstein of the Association of Private Pension and Welfare Funds; Judith Feder of the Georgetown University Center for Health Policy Studies; Greg Scandlen of the Council for Affordable Health Insurance; Deborah Chollet of Georgia State University; Arlene Ash of Boston University; Sonia Muchnick-Baku of the Washington Business Group on Health; Uwe Reinhardt of Princeton University; Mark Rothstein of the University of Houston; and Robert J. Moses of Michales and Wishner. Within the Institute of Medicine, Kathleen Lohr reviewed the discussion of health status measures, effectiveness research, and quality of care. Gary Ellis provided helpful advice on the discussion of employer health promotion programs that originally formed a chapter in a early draft of this report. Elsewhere in the National Academy of Sciences and the National Research Council, Charles Starliper offered much advice on the case studies in Chapter 4. During the first few months of the study, Karen Onstad, an intern from the University of California at Berkeley, helped in assembling and analyzing a large volume of background materials. On many occasions we received information, explanations, and other assistance from a number of individuals at the following organizations:

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Employment and Health Benefits: A Connection at Risk AFL-CIO, American Academy of Actuaries, Blue Cross and Blue Shield Association, Children's Defense Fund, Group Health Association of America, Health Insurance Association of America, Heritage Foundation, Midwest Business Group on Health, Milliman and Robertson, and National Association of Insurance Commissioners. Finally, to publish this report, we relied on a great many people beyond the study committee and staff and those already acknowledged above. In particular, we want to acknowledge Holly Dawkins, who helped review the report proofs as they came back from the National Academy Press; Mike Edington, who helped smooth the publication process in innumerable ways; Roseanne Price, who copyedited the report; and Sally Stanfield, who managed publication of the report at the Press.

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Employment and Health Benefits: A Connection at Risk Contents     SUMMARY   1 1   BACKGROUND AND INTRODUCTION   25     Employment-Based Health Benefits in Context   27     Overview of Report   34     Why This Study?   35     Key Concepts and Terms as Used in This Report   40     Conclusion   47 2   ORIGINS AND EVOLUTION OF EMPLOYMENT-BASED HEALTH BENEFITS   49     The Birth of Insurance for Medical Care Expenses   51     The Divergent Path of the United States   57     Early Cost Management Efforts by Insurers and Others   73     The Limits of Voluntary Health Benefits and Medicare and Medicaid   77     Federal Regulation and the Employer's Growing Role   82     Conclusion   85 3   EMPLOYMENT-BASED HEALTH BENEFITS TODAY   87     Data Sources   88     Who Is and Is Not Covered by Employment-Based Health Benefits?   89     What Types of Coverage Are Offered?   98     What Do Employment-Based Health Benefits Cost?   106     Who Bears the Risk?   111     What Other Health-Related Benefits Do Employers Offer?   114     Conclusion   119

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Employment and Health Benefits: A Connection at Risk 4   WHAT DOES EMPLOYER MANAGEMENT OF HEALTH BENEFITS INVOLVE? OVERVIEW AND CASE STUDY   121     Overview,   121     Core Case Study,   128     Contrasting Cases,   142     Consequences for Employees,   145     Consequences for Practitioners and Providers,   149     A Note on Employers' Legal Liability for Managed Care,   152     Conclusion,   153     Addendum,   155 5   RISK SELECTION, RISK SHARING, AND POLICY   167     Basic Concepts,   168     Factors Contributing to Risk Selection,   170     Evidence of Risk Selection,   177     Policy Questions,   179     Strategies for Responding to Risk Selection and Risk Segmentation,   187     Conclusion,   200 6   HEALTH CARE COSTS: MORE QUESTIONS THAN ANSWERS   202     Health Care Spending: Trends and Explanations,   204     Public and Private Responses to Escalating Health Care Costs,   206     Functioning of the Health Care Market,   220     The Question of Value,   223     Conclusion,   227 7   FINDINGS AND RECOMMENDATIONS   229     Recapitulation,   231     Features, Strengths, and Limitations of the Current System,   234     Future Directions,   242     A Few Comments on Practical and Technical Challenges,   254     Agenda for Research and Evaluation,   256     Final Thoughts,   260     Supplementary Statement of a Committee Member,   261     REFERENCES   262

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Employment and Health Benefits: A Connection at Risk     APPENDIXES         A Opinion Surveys on Employment-Based Health Benefits and Related Issues   287     B Regulation of Employment-Based Health Benefits: The Intersection of State and Federal Law   293     C Participants in Meetings Held in Conjunction with Project   323     D Biographies of Committee Members   328     GLOSSARY AND ACRONYMS   334     INDEX   347 TABLES AND FIGURES Tables 1   Broad Functions or Activities That May Be Undertaken by Employers Providing Health Benefits, Arrayed by Approximate Level of Administrative Difficulty or Complexity   6 2   Summary of Committee Findings and Recommendations on Steps to Respond to Certain Current Limitations of Voluntary Employment-Based Health Benefits   15 1.1   Nonelderly and Elderly Americans with Selected Sources of Health Insurance, Employee Benefit Research Institute Analysis of the March 1991 Current Population Survey   28 1.2   Trends in Government, Individual, and Business Spending in Selected Years, 1965 to 1990   29 1.3   Selected International Comparisons of Health Spending, for Selected Years, 1970 to 1989   32 2.1   Key Dates in the Development of Employment-Based Health Benefits and Its Environment   52 2.2   Standards Adapted by American Association for Labor Legislation in 1914 for Drafting Model State Medical Care Insurance Bill   59 2.3   Summary of Positions on Health Care Coverage in the Majority and Minority Reports of the Committee on the Costs of Medical Care, 1932   62 2.4   Standards for Blue Cross Plans Adopted in the 1930s   68 2.5   Major Categories of ''National Health Insurance" Proposals in the Early 1970s   81 3.1   Percentage of Individuals with Selected Sources of Health Insurance by Own Work Status, 1990   91 3.2   Variations by Size of Employer in Percentage of Wage and Salary Workers Aged 18 to 64 with Employer Health Coverage or No Coverage from Any Source, 1990   96

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Employment and Health Benefits: A Connection at Risk 3.3   Variations by Industry in Percentage of Wage and Salary Workers Aged 18 to 64 with Employer Health Coverage or No Coverage from Any Source, 1990   97 3.4   Percentage Distribution of Employees Across Types of Health Benefit Plans, 1987 to 1990   101 3.5   Selected Examples of State-Mandated Health Coverage   102 3.6   Selected Types of Limits on Mental Health Services Among Several Health Benefit Plans   105 3.7   Employer-Reported Percentage Premium Increases, by Plan Type, 1989 to 1991,   109 4.1   Selected Types of Decisions, Tasks, and Options Faced by Organizations That Choose to Offer Employment-Based Health Benefits   123 4.2   Sources of Variation in Employment-Based Health Benefits   124 4.3   How Size May Affect How Employers Manage Health Benefits   125 4.4   Selected Comparisons of Existing Health Plans in Case Study Organization   132 4.5   Summary Evaluation of Responses to RFP   139 4.6   Possible Tasks, Responsibilities, and Decisions for Employees   147 5.1   Estimated Impact of Biased Risk Selection on Premiums in a Multiple-Choice Program, Individual (self-only) Coverage, Federal Employees Health Benefits Plan, 1989   176 5.2   Some Possible Strategies for Responding to Biased Risk Selection   188 5.3   Major Provisions on Which Proposals for Reform in Underwriting Practices May Differ   189 5.4   Some Steps Proposed to Manage or Limit Health Plan Competition Based on Risk Selection   192 6.1   Percentage of Surveyed Employers Reporting Selected Utilization Management Features, 1987 to 1991   214 6.2   Percentage of Full-time Participants in Employment-Based Fee-for-Service Health Plans Subject to Selected Cost Containment Features   215 7.1   Broad Functions or Activities That May Be Undertaken by Employers Providing Health Benefits, Arrayed by Approximate Level of Administrative Difficulty or Complexity   233 7.2   Summary of Committee Findings and Recommendations on Steps to Respond to Certain Current Limitations of Voluntary Employment-Based Health Benefits   244 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   255

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Employment and Health Benefits: A Connection at Risk Figures 1.1   Percentage of expenditures for health services and supplies, by payer, 1965 to 1990   30 3.1   Work status of the family head for the 35.7 million Americans under age 65 who were without health insurance, 1990   93 3.2   Percentage of firms offering various types of health plans for firms offering a plan, by firm size, 1991   99 3.3   Flow of funds from sponsors of health care into the health care system in the United States, 1990   107 3.4   Growth in health plan costs, expressed in total dollars per employee for 1985 to 1991 and percentage increase from previous year   109 3.5   Percentage of firms self-insured by total number of employees, 1991   112 5.1   Variation in average annual plan premiums for the typical health plan, by age and gender, 1986   173 6.1   Reasons for growth in personal health care expenditures, 1981 to 1990   205

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