Summary

To make the many accomplishments of modern medicine available to its people, the United States depends heavily on a voluntary system of employment-based health benefits. Although neither federal nor state law generally requires employers to finance health coverage for employees and their families, approximately 140 million people—nearly two-thirds of all Americans under age 65—receive health benefits through the workplace.

The United States is unique in relying on employers to do voluntarily what governments in most other countries either do themselves or require private parties to do on an extensively regulated basis. Not only are employers in this country free to offer or not offer coverage, they have extensive discretion in determining what specific benefits are to be offered, how they are to be administered, what share of benefit costs will be paid by employees, and what will be attempted to control the employer's costs.

Most of those with employment-based health benefits view them favorably and value them highly. Overall dissatisfaction with the U.S. health care delivery system is, however, quite strong. Among ordinary citizens, policymakers, providers, and business people, it is widely seen as too inequitable and too complex and not effective enough given the level of resources committed. Over 35 million Americans are uninsured, and for millions more coverage is precarious or inadequate. There is widespread feeling that medical care costs are out of control and that the patience of health care purchasers—public and private—is wearing thin. These feelings feed back as further reason to worry about the structure of health care delivery and financing, including its link to the workplace.

Many proposals for health care reform would replace existing arrangements with fundamentally different relationships among patients, medical



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Employment and Health Benefits: A Connection at Risk Summary To make the many accomplishments of modern medicine available to its people, the United States depends heavily on a voluntary system of employment-based health benefits. Although neither federal nor state law generally requires employers to finance health coverage for employees and their families, approximately 140 million people—nearly two-thirds of all Americans under age 65—receive health benefits through the workplace. The United States is unique in relying on employers to do voluntarily what governments in most other countries either do themselves or require private parties to do on an extensively regulated basis. Not only are employers in this country free to offer or not offer coverage, they have extensive discretion in determining what specific benefits are to be offered, how they are to be administered, what share of benefit costs will be paid by employees, and what will be attempted to control the employer's costs. Most of those with employment-based health benefits view them favorably and value them highly. Overall dissatisfaction with the U.S. health care delivery system is, however, quite strong. Among ordinary citizens, policymakers, providers, and business people, it is widely seen as too inequitable and too complex and not effective enough given the level of resources committed. Over 35 million Americans are uninsured, and for millions more coverage is precarious or inadequate. There is widespread feeling that medical care costs are out of control and that the patience of health care purchasers—public and private—is wearing thin. These feelings feed back as further reason to worry about the structure of health care delivery and financing, including its link to the workplace. Many proposals for health care reform would replace existing arrangements with fundamentally different relationships among patients, medical

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Employment and Health Benefits: A Connection at Risk care providers, and those financers of care. Some would put a single national purchaser—the federal government—in charge. Others would put the cost-conscious individual consumer at the helm. Yet others would mix strong government regulations with market competition among certified health plans. Most of these proposals would leave employers with a more limited role than they have now. The debate over health care reform raises many controversial questions involving the obligations of richer or healthier individuals to help poorer or sicker individuals, the role of the private versus the public sector in ensuring access to needed health care, the virtues of voluntary versus compulsory insurance, and the effectiveness of market versus regulatory strategies to contain costs and ensure value. Regardless of the stance taken in such debates, the central position of employment-based health benefits is a major factor to be reckoned with in considering the feasibility and specifics of proposals for change. This report explores the following questions: How did the current system of voluntary employment-based health benefits develop? How does it relate to the overall structure of health care delivery and financing in the United States? What are its basic characteristics, strengths, and limitations? What might be done about the limitations? The committee believes that the results of this exploration will 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. The findings and recommendations presented 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 to define the appropriate role of advanced medical technologies, two issues that trouble all economically developed countries regardless of their system of financing medical expenses. Furthermore, 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 those problems cannot go forward in isolation from the system examined here. Rather, this report sets forth some steps that government, business, individuals, and health care practitioners and providers could take to alleviate certain problems related to the current link between the workplace and health benefits. These steps are grouped into two divisions: one that assumes the preservation of a voluntary system of employment-based health benefits and a second that assumes that a voluntary system cannot significantly extend access, control biased risk selection, or manage costs. This discussion does not constitute a general committee endorsement or rejection of either a voluntary or a compulsory system of employment-based health benefits.

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Employment and Health Benefits: A Connection at Risk Overall, the current system of voluntary employment-based health benefits earns both positive and negative marks. It is a dynamic system that continues to change in both constructive and destructive ways. The negatives are, however, becoming more significant. They need to be confronted through action, both public and private, if the nation wants to preserve a productive role for employment-based health benefits. EMPLOYMENT-BASED HEALTH BENEFITS IN CONTEXT Historical Development In the United States, the strong link between health benefits and the workplace developed through a combination of historical coincidences and deliberate decisions. Its emergence depended on the voluntary initiative of many private individuals and groups, the largely unintended impetus of federal tax and labor laws, the collective bargaining strategies of trade unions, and the repeated failure of proposals for some kind of government-mandated health insurance. Beginning in the early 1930s, this system of voluntary employment-based health benefits experienced three decades of rapid growth. Only in the 1960s and 1970s were major government programs established to cover the elderly, the disabled, and some of the poor—all groups ill-suited to private insurance. Today, however, neither government nor employment-based coverage reaches many low-income or high-risk workers and their families, especially those who work for small firms or on a part-time or seasonal basis and those who are chronically ill. Moreover, in recent periods, the continual exercise of employer and individual choice among private insurance or health plan options has diminished the degree to which the burden of health care expenses is shared among the well and the ill. Health care costs are highly skewed in their distribution. In any year, perhaps 5 percent of a population will account for 50 percent of expenditures, and 20 percent will account for 80 percent. Thus, any health plan (or employer) that is relatively successful at avoiding this group will have a significant competitive advantage, though not a socially constructive one. Key Statistics The relative importance of private and public sources of health benefits and health care spending is suggested by the following statistics: Seventy-three percent of all Americans below the age of 65 have private health coverage, the great majority through programs sponsored by private and government employers and unions.

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Employment and Health Benefits: A Connection at Risk Almost 36 million Americans below the age of 65—17 percent—have no health benefits. Of this group, 85 percent live in families headed by a worker, usually one who works for a firm with fewer than 100 employees and over half the time one who works full-time. Ninety-six percent of all Americans age 65 and over are covered by public programs, many have supplementary private coverage (some of it employer sponsored), and only 1 percent have no health coverage. Public program spending accounts for approximately 40 percent of all spending on health care services and supplies, and employers and households account for roughly equivalent shares of the rest. Households now directly finance a much smaller proportion of health care than they did 30 years ago, and government and business finance a greater share (although individuals still contribute indirectly to this financing, for example, through income taxes and forgone wages). Although the proportion of the nonelderly population covered by employment-based health benefits leveled off during the 1970s and even decreased from 66 to 64 percent between 1988 and 1990, business spending on health benefits continues to grow as a fraction of total labor compensation. Business health spending stood at 7 percent of total labor compensation in 1990, up from 2 percent in 1965 and 5 percent in 1980. For the nation as a whole, about 12 percent ($666.2 billion) of the gross national product was accounted for by spending on health care (including noncommercial health research and construction) in 1990, up from 6 percent in 1965 and 9 percent in 1980 (Levit et al., 1991). This high and increasing commitment of resources to health care reflects a generally rising standard of living, an aging population, more comprehensive health care coverage, an incentive structure that encourages high medical spending (e.g., third-party payments on an open-ended fee-for-service reimbursement basis), tax policy, and other factors. However, given the common pattern of rising costs across nations with greatly different health systems, the unique structure of the U.S. system cannot be held solely or perhaps even primarily responsible for increasing costs. The influence of new medical technologies and practices together with rising expectations, although extremely difficult to document, may be hard for any system to resist. International Comparisons The United States stands out among economically advanced nations for its high overall level of health care spending, its large numbers of uninsured individuals, and its extensive segmentation of high-and low-risk individuals into separate risk pools. It is also noteworthy for the relatively low

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Employment and Health Benefits: A Connection at Risk proportion of total health care spending that is accounted for by public sources, approximately 40 percent in the United States versus 95 percent in Norway (the highest), 87 percent in the United Kingdom, and over 70 percent in France, Germany, and Japan (Schieber and Poullier, 1991). Distinctiveness is often a matter of pride, as are high expenditures for a socially valued service. No pride can, however, be derived from the fact that this country spends so much more on health care than other countries while leaving a significantly larger fraction of its population uninsured and not appearing to achieve clearly superior health outcomes. Nonetheless, virtually all economically advanced countries—regardless of how they finance and deliver care—worry 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 likely that the United States would lead the world in the proportion of national resources devoted to health care even if 20, 40, or 60 years ago it had adopted some other system of health care coverage. If it had followed the pattern of other developed nations, however, it might not also lead in the proportion of the population uninsured. Scope and Functions Within the United States, the offering of health benefits to employees and their families is virtually universal in large and medium-sized organizations (those with 100 or more employees). Only about half of all workers are, however, employed by these organizations, and this fraction is declining. Among the smallest organizations (those with fewer than 25 employees), only about one-third of workers receive coverage directly from their employer, former employer, or union. The reasons are diverse: many small employers feel that even limited coverage is 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, those who manage and work for small organizations operate in environments with problems and options regarding health coverage that differ in significant ways from the environments faced by larger firms. Large organizations generally cover a large portion of the cost or premium for employee coverage, but their contributions for family coverage vary considerably. In addition, they often help employees understand their health coverage and resolve problems with specific health plans. Moreover, large employers have become increasingly active in health benefit management by offering employees choices among competing health benefit plans, limiting employee choice of health care practitioners, adding managed care features to indemnity health plans, and developing workplace health promo-

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Employment and Health Benefits: A Connection at Risk TABLE 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       tion programs. At the same time, large employers are focusing—more than ever before—on how they can have employees pay a larger share of costs directly, how they can get the best possible rates from health care providers regardless of the impact on others in the community, and how they can avoid sharing the risk for medical care and benefit costs for anyone other than their employees and, perhaps, their dependents. For small employers that offer coverage, options and involvement tend to be quite limited. Table 1 depicts some of the important functions assumed by employers and the relative difficulty or complexity of these functions. It does not attempt to list the positive and negative effects on employees or the community that may follow from specific steps taken by employers in carrying out these functions. In general, the participation by employers in these functions falls off sharply between the first and second functions—particularly among small employers—and also between the second and third functions (reading across the table from left to right).

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Employment and Health Benefits: A Connection at Risk Access to Health Services Coverage is not the same as access, which has been defined in another Institute of Medicine report as the timely use of personal health services to achieve the best possible health outcomes. Some who have coverage still face access problems by virtue of their location, race, education, or other personal characteristics or as a result of 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, and some needy individuals receive primary and preventive services through public and private programs and charity care offered by individual practitioners. Access overall is, however, often not timely and is rarely coordinated, and the financial burden of uncompensated and public care for the uninsured is very unevenly borne across communities. Costs in Context For more than two decades, concerns about high and escalating medical care expenditures and strategies to control those costs have been a major focus of health policy. The continuation of the former and the ineffectiveness of the latter not only have made it more difficult to extend health coverage to those now uninsured and underinsured but also have been partly responsible for the growth of this pool. 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 and making such care less affordable for many without having much evidence or confidence that it is achieving better health outcomes or other equivalent value for its increased investment. Efforts to accumulate such evidence, to evaluate and compare the costs and benefits of alternative medical practices, and to generally assess the quality of medical care are increasing in numbers and sophistication. Nonetheless, the public and private resources devoted to these efforts are minuscule compared with those devoted to developing more advanced treatments and technologies. The health care market is in a variety of respects not currently structured to achieve the efficiency expected of properly functioning markets. The debate over health care reform centers on several questions: Can major changes in public policy create an effectively functioning market? Should the employer have a major role in a market-oriented approach? Would, on balance, the projected effects of one or another kind of reformed market be better or worse than the effects of major alternatives, which occupy a spectrum of possibilities from the current system on the one hand to a single payer, single national health plan on the other hand?

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Employment and Health Benefits: A Connection at Risk DISTINGUISHING FEATURES OF THE CURRENT SYSTEM Any concise statement of key features of employment-based health benefits in the United States must simplify and generalize from a world that is neither simple nor uniform nor static. Nonetheless, on the basis of descriptions and analyses presented in the first six chapters of this report, several characteristics stand out. 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 or for a private health insurance market based on individual choice and responsibility or some combination of these principal alternatives. 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. Voluntary group action 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 some efficiencies in program administration. Once an employer opts to offer health benefits, some governmental limits on its discretion may apply, but they are relatively modest. Lack of Universal Coverage More than 30 million uninsured Americans, the great majority of those without health benefits, are workers or their family members. In contrast, virtually every other advanced industrial nation covers all, or all but a very small fraction of, its population. Most require employers—and employees and taxpayers generally—to finance coverage, and most subsidize low-income workers and make special arrangements for seasonal or other workers with limited connections to the workplace. Absent such compulsion and support, many U.S. employers choose not to offer health benefits to all or some of their employees. Such employees are especially likely to work

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Employment and Health Benefits: A Connection at Risk part-time, seasonally, or in low-wage jobs for small employers. Some workers, if offered a choice of health benefits versus higher wages or the opportunity to work full-time, might decline the former—as do a small percentage of workers today when they have a choice, even if they have no other coverage. Risk Selection and Discrimination Biased risk selection is always possible when individuals, employers, or other groups can choose whether or not to buy health coverage or whether to select one health plan rather than another. Unfortunately, this continual exercise of choice—a valued feature of individual liberty and of markets generally—can create both philosophical and practical problems in the health care arena. In particular, it can seriously diminish the degree to which the burden of health care expenses is shared among the well and the ill. Employment-based health insurance was initially a powerful vehicle for spreading risk among the well and the ill. It is becoming less so, however, most notably for employees of small organizations but increasingly for those who work or seek to work for larger organizations. For some 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 more attractive than trying to manage health care utilization or prices. 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 individual employees and their families. They have the potential to use that information to make overt or covert decisions about individual's continued employment, a particularly troublesome form of risk selection. Rapid advances in genetic technologies for identifying individual risk for various diseases is making information available that could be used by insurers to reject or 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. The current structure of voluntarism in the health sector concentrates a great deal of discretion at the employer level. 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. Because the national government has precluded state regulation of employee benefits (except as

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Employment and Health Benefits: A Connection at Risk they are indirectly affected by state insurance regulation) and simultaneously chosen to leave many important aspects of these 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. 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. At their worst, employers may arrange coverage through corrupt or incompetent sources, discriminate against employees on the basis of health status, and terminate benefits unilaterally. Diversity Although patterns have developed that are associated with variations in employer size, region, industry, and other factors, 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 what level of employee cost sharing and other cost containment features, and at what overall cost). For health care providers, employment-based health benefits have promoted diversity in the prices paid by different purchasers and, as described below, in the administrative practices with which providers have to comply. Innovation Compared with 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 that have little if anything to do with employment-based health benefits, the United States is also a leader in many areas of clinical and health services research. Although their specific influence cannot be easily identified, the country's largest employers and unions probably have helped encourage selected fields of research, for example, 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. 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

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Employment and Health Benefits: A Connection at Risk 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 following a job change, but the continuity of medical care is still disrupted because the new job's health plan requires a change of health care practitioner. Such discontinuity of care for those with serious health problems is likely to become an increasingly important issue as more employers and health plans attempt to restrict individuals to defined networks of health care practitioners and providers. Through their national health plans or regulatory standards for sickness funds and similar organizations and their general commitment to universal coverage for basic health services, other countries limit the likelihood that changes in job status or employers' policies will 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. Employers' capacities and incentives to manage health benefit programs effectively are quite uneven and will remain so. Managing health benefits is a secondary issue in most employers' visions of their future and in their priorities, and some seem to feel that pressing hard on health care costs may, at some point, actually undermine employee morale and other values. At their best, employers' skills in health benefit management can be quite sophisticated, but this sophistication is generally limited to the largest employers. At their worst, employers rely for cost containment on risk segmentation, discrimination, and excessive intervention in patient-clinician decisionmaking. Direct evidence that employers' cost containment efforts make a difference, especially for overall health care costs, is very limited . On the other hand, the track record for public cost containment strategies is not dramatically more positive. Complexity Several of the features singled out above—diversity, discontinuity, risk segmentation—contribute to another distinctive feature of the U.S. health care system: the immense complexity of its public and private methods for providing and managing health benefits. A great array of differing coverage

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Employment and Health Benefits: A Connection at Risk 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 most economically advanced countries, regardless of their system of medical expense protection. Nearly all members of this committee1 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 2 summarizes the committee findings and recommendations that are discussed in this section and the next and links them to the limitations in the current system identified earlier. The emphasis in the first subsection below 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. 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 em- 1   One member prepared a supplementary statement. See page 261.

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Employment and Health Benefits: A Connection at Risk TABLE 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. ployee groups. Movement in this direction will require a set of interrelated actions affecting (1) underwriting practices, (2) employers' access to personal 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

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Employment and Health Benefits: A Connection at Risk 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 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 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, by itself, eliminating or further regulating these medical underwriting practices 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. 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. Nonetheless, most members believe that such risk rating of health coverage is, on balance, neither fair nor productive given the myriad genetic, cultural, economic, and other factors that shape individual behavior and limit self-determination. Moreover, identifying a risk factor is not the same as identifying a reliable and successful strategy for reducing the risk and its health consequences. 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 segmentation are becoming more attractive to financially pressed employers. To prohibit medical underwriting within self-insured groups would require federal action to amend the Employee Retirement Income Security Act (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 employers 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.

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Employment and Health Benefits: A Connection at Risk 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 the 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 by both employers and health plans have an important role, although covert discrimination is always difficult to detect and eliminate. Risk-adjusted employer or government contributions to health plans An end to medical underwriting may diminish one source of risk segmentation in a competitive market, 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, or features that attract sicker individuals, or other characteristics that do not warrant marketplace penalties. One protection is risk-adjusted contributions to health plans by employers and governments (for enrollees from public programs), although additional protections involving very high cost individuals will still be needed.

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Employment and Health Benefits: A Connection at Risk 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. For example, small employers 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 strategies. The design of practical and reasonably effective policies will be a challenge. Subsidizing Coverage 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 costly health care services. Overall, in the absence of some financial assistance to some

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Employment and Health Benefits: A Connection at Risk 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. 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, 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, whereby 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

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Employment and Health Benefits: A Connection at Risk 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. The Financing Dilemma Although the combination of the steps described in this and the next section would address important weaknesses in the current system, they would do nothing to control the rate of increase in health care spending. Moreover, some would impose new financial obligations for federal or state governments, employers, or employees. Any broad new policy of subsidized voluntary (or compulsory) coverage 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 individuals or both could be financed by cutting health care spending, by shifting resources from other areas, by increasing taxes in some fashion, 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 believe it is unrealistic to expect such good performance in these areas that all the costs of extending coverage could be offset. Committee members have quite different views on what cost containment strategies show the most potential to be effective, equitable, and compatible with good quality care and on whether these strategies should include an important role for employers. Thus, this report includes no recommendations on the major obstacle to any form of universal health insurance. In addition, this report makes no recommendations on the use of payroll, income, or other taxes to finance coverage or on the amount individuals ought to contribute directly for health coverage. It 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.

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Employment and Health Benefits: A Connection at Risk Beyond Voluntary Coverage The steps described in the first part of Table 2 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. Nonetheless, some employers and workers 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 most of the committee, 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 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. Although the committee did not examine the problems of the self-employed and those with no connection to the workforce, it believes that the arguments for universal coverage apply to these groups as well. One rationale for requiring health coverage lies in a major limitation of a voluntary system that precludes medical underwriting. That is, some individuals or groups would choose not to purchase coverage until faced with a health problem. Such action is like buying fire insurance while one's house is burning down or life insurance once terminal illness has been diagnosed. Although this kind of behavior can be controlled by leaving some medical underwriting in place, the majority of this committee believes, on balance, that leaving individuals and families without coverage is not a desirable strategy, especially since low-income groups—even if subsidized—are likely to be overrepresented in the excluded class. Another rationale is that although those without coverage can generally obtain health care once medical problems have become emergencies, such care tends to come late in the course of the problems, many of which could have been prevented or treated more effectively with more timely care. Emergency care 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, regulated hospital rates) to help cover uncompensated care in hospitals and have established limited programs to provide primary and preventive care to the uninsured, these are second-best strategies in the view of this committee—especially given the current vulnerability of these schemes to ERISA challenges. Again, most members of this committee believe that extending health benefits is preferable on grounds of improving health status and achieving equity.

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Employment and Health Benefits: A Connection at Risk Greatly different approaches are possible to implement compulsory and subsidized coverage, and provisions 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. In contrast, some advocates of a strong government 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, and free-lance) and discontinuity of specific benefits or sources of health care related to 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 practitioner or provider). A national nonemployment-based program that allowed for choice among health plans would, however, require some mechanisms for controlling or compensating for selection. The primary appeal of 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 also encourages employer interest in the link between health care and worker productivity and well-being and the link between health spending and health outcomes. Again, this committee does not take a specific position about broad options for health care reform. It 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. 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

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Employment and Health Benefits: A Connection at Risk 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. Research Agenda Implied or stated in the committee's findings are several important research questions. Some are already the subject of much attention, whereas others have, as yet, been little emphasized. In summary, they involve the following five areas: methodologies for risk adjusting payments to health plans,  consequences of underwriting reforms,  challenges and options in defining basic benefits,  employer assistance with employee decisionmaking and problem resolution, and  continuity of patient care in the context of multiple-choice among network health plans. FINAL THOUGHTS 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 (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 tradeoffs are growing more specific. Do employment-based health benefits offer sufficient ''value added" to

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Employment and Health Benefits: A Connection at Risk make their continuation, indeed their mandating, worthwhile even if some important limitations of the system cannot be fully corrected? 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 perceived as valuable to most Americans. Nonetheless, most committee members foresee a continued deterioration in the quality and scope of health coverage unless major steps are undertaken to reduce or correct the serious weaknesses in the system. Most believe it unlikely that a larger proportion of small employers will 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. As noted above, those who would limit employer involvement in health benefits largely or entirely to a financing role may overestimate the degree to which employers will acquiesce in funding increased spending under such circumstances. 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 help that employers can provide to employees facing problems with their health coverage. Because imperfect performance can be expected from a single national system or a competitive market based on individual (not employer) choice, employers might very well see advantages in a new kind of "employee assistance program." This program could provide employees with aid in understanding 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 employers to become unconcerned 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, some 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 wider and more equitable access to more appropriate health care at a more reasonable cost.