7
Findings and Recommendations

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

E.E. Schattschneider, 1960

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

Focus group participant, 1992

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

Harlan Cleveland, 1937

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

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



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Employment and Health Benefits: A Connection at Risk 7 Findings and Recommendations In some ways the public interest resides in the no man's land between government and business. E.E. Schattschneider, 1960 Yes, I favor national health insurance as long as you don't have the government too involved. Focus group participant, 1992 If we are going to govern ourselves without inflating our governments more and more, the nongovernments in our society will have to think of themselves quite self-consciously as part of governance. Harlan Cleveland, 1937 The United States can make more constructive use of its mixed structure of public and private health coverage. Doing so will require, at a minimum, a new self-consciousness about the role of the employer and significant changes in the relationship between the public and the private sectors in the governance of the nation's arrangements for financing and delivering health care. Precedents for such change exist. Beginning in the 1930s and 1940s, voluntary private initiative combined with some indirect regulatory stimulus helped produce for millions of Americans a remarkable breadth, quality, and depth of medical care and medical expense protection. In the mid-1960s, the nation reached a consensus that public programs were necessary to finance appropriate coverage for the elderly (through Medicare) and some of the poor and near-poor (through Medicaid), although the latter program has failed to reach many low-income individuals and families. Now, at the end of the century, renewed creativity and public-spiritedness are required to devise and negotiate public and private initiatives to protect more Ameri-

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Employment and Health Benefits: A Connection at Risk cans against the costs of ill health, to achieve health outcomes commensurate with the resources expended for health services, and to encourage broad risk sharing among the well and the ill. Reform that maintains a major role for employment-based health benefits is certainly not the only option for the United States, as witnessed by proposals for a single government program, on the one hand, or for a market based on the individual purchase of insurance, on the other. Some members of the Institute of Medicine study committee believe that improving the employment base has more pragmatic and philosophical appeal than abandoning it. Other committee members disagree and believe this base is too structurally flawed to ever meet basic access, quality, and cost objectives. In any case, no one should expect that a significantly more equitable and cost-effective system of employment-based health benefits can be obtained without major adjustments in current arrangements. In examining today's structure of employment-based health benefits, the committee had two basic tasks, one empirical, the other evaluative. The first task—to understand and describe the current system—provided the focus of the preceding chapters. This task was a challenge given the system's variability, its bent for change, and the limited evidence to distinguish the consequences of employment-based health benefits from those of third-party payment in general or from other features of health care financing and delivery in this country. The committee's second task gives rise to this concluding chapter, which presents the committee's assessments and findings. What follows is (1) a brief recapitulation of themes to this point, (2) a characterization and assessment of key features of this country's system of voluntary employment-based health benefits, (3) a set of findings and recommendations about how this system might be improved, (4) a few comments on practical and technical challenges, and (5) a number of suggestions for future research. The findings reported here do not constitute a blueprint for health care reform, even for reform that seeks to build on voluntary employment-based health benefits. In particular, the findings do not address the most effective means to limit the rapid escalation in health care costs and define the appropriate role of advanced technologies, two issues that trouble all economically developed countries, regardless of their system of medical expense protection. In addition, the discussion here does not touch directly on the problems facing Medicare, Medicaid, and other public programs, although the committee recognizes that efforts to resolve these problems cannot go forward in isolation from the system examined here. Instead, this chapter sets forth some steps that government, business, individuals, and health care practitioners and providers could take to alleviate certain problems related to the link between the workplace and health benefits. These steps are grouped into two divisions: one that assumes the

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Employment and Health Benefits: A Connection at Risk preservation of a voluntary system of employment-based health benefits and a second that assumes that a move beyond a voluntary system is required if the nation is to extend access significantly and use resources more effectively to improve health status. These steps do not constitute a general committee endorsement or rejection of either a voluntary or a compulsory system of employment-based health benefits. RECAPITULATION The preceding chapters have examined the evolution of employment-based health benefits in the United States, described basic coverage and management features of the current system, and identified several sources of variation across workplaces. They have depicted some of the practical implications for employers, employees, and health care providers of employer involvement in managing health benefits. The troublesome problems of biased risk selection and risk segmentation have been examined, along with some proposed responses to these problems. Finally, concerns about the level and rate of increase in health care costs and the means of controlling costs have been explored. The focus has not been on costs as such but rather on the value achieved for health care spending compared to alternative uses of limited resources. Clearly, this nation's continued reliance on voluntary employment-based health benefits to cover most workers and their families reflects a distinctive American history. One facet of this history is the result of the creative private efforts of employees, trade unions, employers, health care providers, and others to develop mechanisms to spread and budget the risk of medical expenses for many workers and their families. Another facet of this history involves a cultural predilection for private rather than public action, which has contributed to the repeated failure of proposals to extend social insurance programs to cover medical care expenses for the entire population. Instead, the public interest has been reflected in tax, collective bargaining, and other policies that have directly and indirectly shaped and stimulated a voluntary system of employment-based coverage for workers and their families. The adoption of Medicare and Medicaid in 1965 and Medicare's expansion to include the disabled in 1972 brought public insurance to many of those for whom private insurance was ill-suited. In 1974, under the Employee Retirement Income Security Act (ERISA), the national government assumed sole authority to regulate employee benefits. It has not, however, exercised much regulatory oversight in the health benefits arena. The states still have some indirect influence when employers transfer financial risk for their health benefit programs to insurance companies, which states may regulate under the McCarran-Ferguson Act of 1945. The impact of state regulation has, however, diminished as more and

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Employment and Health Benefits: A Connection at Risk more employers have opted for self-insurance arrangements that are exempt from state oversight and as the courts have broadened the interpretation of ERISA's preemption of state statutory and common law in matters "related to" employee benefits. Overall, for most Americans with a strong connection to the workplace, the system provides very reasonable access to the benefits of biomedical science and technology at a relatively modest direct personal cost in the form of premium contributions and other cost sharing. When people are asked to rate the most important employee benefit, a substantial majority select health benefits. Surveys also indicate that more Americans think employers rather than government should be the most responsible for providing health benefits for full-time employees and their dependents, although no specific plan design or policy commands the unequivocal support of the majority. The offering of employment-based health benefits is virtually universal in large and medium-sized organizations. These organizations generally cover a large portion of the cost or premium for employee coverage but vary considerably in their contributions for family coverage. They often help employees understand their health coverage and resolve problems with specific health plans. Employers have become increasingly active in the management of health benefits by offering employees choices among competing health benefit plans that limit employee choice of health care practitioner, adding managed care features to indemnity health plans, and developing workplace health promotion programs. At the same time, some larger employers are focusing—more than ever before—on how they can have employees pay a larger share of costs directly, how they can avoid sharing the risk for medical care and benefit costs for anyone other than their employees and, perhaps, their dependents, and how they can get the best possible rates from health care providers regardless of the impact on others in the community. In this latter regard, they join Medicare, Medicaid, and some network health plans in contributing to concerns about cost shifting, that is, the attempt by health care providers to make up for certain payers' discounts and underpayments through higher charges to less powerful groups and individuals. Table 7.1 depicts some of the important functions assumed by employers and their relative difficulty or complexity. In general, the participation by employers in these functions falls off sharply between the first and second functions (particularly among small employers) and the second and third functions represented on the left side of the table. The table does not attempt to rate employer performance or to portray the positive and negative effects on employees or the community that may follow from specific steps taken by employers in carrying out these functions. Only about half of all workers are employed by the large and medium-

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Employment and Health Benefits: A Connection at Risk TABLE 7.1 Broad Functions or Activities That May Be Undertaken by Employers Providing Health Benefits, Arrayed by Approximate Level of Administrative Difficulty or Complexity LEAST DIFFICULT OR COMPLEX   MOST DIFFICULT OR COMPLEX   Direct Contracting with Health Care Providers or Direct Provision of Health Care Services       Direct Administration of Claims, Utilization Review, and Other Management Functions       Extensive Tailoring and Detailed Oversight of Health Benefit Program     Contributing to Plan Premium, Monitoring Basic Aspects of Health Plan Performance, Assisting Employees with Problems     Facilitating Participation in Health Plan: Enrollment, Information Distribution, Payroll Deduction       sized organizations in which health benefits are virtually universal, and this fraction is declining. Among organizations with fewer than 10 employees, one survey suggests that only one quarter offer health benefits, although another survey suggests that proportion may be nearer to half. Moreover, efforts to reach employees of small firms through "bare bones" insurance and other relatively inexpensive products have had limited success. The reasons are diverse: many small employers feel that even limited coverage is still too expensive; others believe their employees do not need or want it; and some do not see its provision as an employer's responsibility. In general, the problems and options regarding health coverage faced by small organizations differ in significant ways from those faced by larger organizations. Many proposals for health care reform are particularly targeted at small employers. High health care costs are frequently portrayed as the nation's number one health policy problem, but the problem is more complex. That is, the country is spending a greater share of national resources on medical care

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Employment and Health Benefits: A Connection at Risk and making it less affordable for many without being confident that it is achieving better health outcomes, greater labor productivity, or other equivalent value for its increased investment. Efforts to accumulate evidence on outcomes and to evaluate and compare the costs and benefits of alternative medical practices are increasing in number and sophistication. Nonetheless, the resources devoted to these efforts are minuscule compared with those devoted to new medical treatments and technologies, and—as noted later—this is an area in which further research is a priority. In considering the current system of voluntary employment-based health coverage and various proposals for change, it is important to remember that coverage is not the same as access. Some who have coverage still face access problems by virtue of their location, their race or other personal characteristics, or specific characteristics of their coverage, such as low rates of payment for physician services. Likewise, even those who lack health insurance have some access to care on an emergency basis for serious illness or injury, although the financial burden of this uncompensated care is very unevenly borne across communities. Access to preventive and primary care services is much more difficult for the uninsured, although public and private outpatient programs and charity care offered by individual practitioners do help some needy individuals who lack health coverage. Extending health insurance to the currently uninsured population would not guarantee adequate access to appropriate health services, but it almost certainly would assist them in obtaining preventive and primary care that could improve their health status and quality of life. Whether some of the currently uninsured—and some who are now insured—would be better served by direct care arrangements (such as the U.S. veterans hospitals or publicly funded preventive and primary care clinics) or some other alternative or supplement to individual health insurance is a serious question, one that is not much discussed in the current debate over health care reform. FEATURES, STRENGTHS, AND LIMITATIONS OF THE CURRENT SYSTEM Any concise statement of key features of the U.S. system of health care coverage and the role of employment-based health benefits must simplify and generalize from a world that is neither simple nor uniform nor static. Nonetheless, based on the descriptions and analyses presented in the first six chapters of this report, the following nine characteristics stand out: Voluntary group purchase  Lack of universal coverage  Dispersed power and accountability  Diversity

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Employment and Health Benefits: A Connection at Risk Innovativeness  Discontinuity  Risk selection and discrimination  Barriers to cost management  Complexity. Most of these characteristics distinguish the system in the United States from systems in other advanced industrial nations and from what is envisioned by proposals for a fully public system of health insurance. They are not, however, purely a function of voluntary employment-based health coverage. If the link between employment and health benefits were abandoned or retained only as a conduit for financing health benefits, some of the features discussed below would likely disappear, but others might persist—or even become more prominent—depending on the specific changes made. Reforms that retained a significant role for employers might bring significant or only marginal changes, again depending on their specifics. Voluntary Group Purchase The very subject of this report is a defining, indeed unique, feature of the U.S. health care system: reliance on health benefits voluntarily sponsored by employers—or collectively bargained between employers and unions—to cover the majority of nonelderly individuals. The use of the employee group (more specifically, the larger employee group) as a basis for health insurance has mitigated the problems of risk selection that plagued initial private efforts to insure individual expenses for medical care. It has offered an alternative to government mandates but still created purchasers with more leverage than single individuals can normally bring to bear in buying health insurance, identifying and resolving problems, and securing efficiencies in program administration. Once an employer opts to offer health benefits, some governmental limits on its discretion may apply. For example, employers are generally required to provide employees with certain summary information about their health plan, offer continued coverage to former workers and others under certain circumstances, and cover workers aged 65 to 69. In assuming the purchaser role, the main question for employers has been what, if anything, do they need to offer as health benefits to attract and maintain a productive work force and to compete or otherwise function effectively. The collection of employer—and employee—responses to this question have in large measure defined the current system (both its public and its private aspects) and directly affected both the definition and the realization of broader societal objectives. Most proposals to eliminate the voluntary character of the current system through mandatory public, employer, or individual coverage are a response to the following characteristics of this system.

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Employment and Health Benefits: A Connection at Risk Lack of Universal Coverage Group purchasing voluntarily supported by employers helps make health coverage possible for many who would likely go without it in the current market for individually purchased insurance. Nearly two-thirds of Americans under age 65, almost 140 million individuals, are covered by employment-based health benefits. Another 10 million of those aged 65 and over have Medicare supplemental benefits provided by a former employer. Compared with the previous system in which neither government nor employers assisted individuals in covering medical care expenses, this system has undoubtedly expanded health coverage. On the other hand, more than 35 million Americans lack insurance, and the great majority of those without health benefits are workers or their family members. Virtually every other advanced industrial nation covers all, or all but a very small fraction of, its population. Most either require employers to help finance coverage for workers or strongly encourage them to do so through positive incentives or subsidies aimed at the employer or employee or both, and most have special provisions for those with limited links to the work place. In contrast, many U.S. employers choose not to offer health benefits to all or some of their employees. Such employees are especially likely to work part-time, on a seasonal basis, or in low-wage jobs for small employers. Some, if offered a choice of health benefits versus higher wages or the opportunity to work full-time, might decline the former—as do some workers today. Risk Selection and Discrimination Employment-based health insurance was initially a powerful vehicle for spreading risk among the well and the ill, and it still offers distinct advantages over the current market for individually purchased coverage. In recent years, however, some of the advantages associated with employment-based coverage have been diminishing, most notably for employees of small organizations but increasingly for those who work or seek to work for larger organizations. For employers as well as insurers, the selection of low-risk workers or enrollees or the use of rules regarding preexisting conditions to exclude high-risk workers from health plans can be a more attractive strategy for limiting costs and increasing profits than trying to manage health care utilization or prices more effectively. Although federal law limits the use by employers of medical examinations and questionnaires, employers can generally obtain from their health plans extensive medical information about employees and their families. They have the potential to use that information to make overt or covert decisions about workers' continuing employment, a particularly troublesome form of risk selection. Rapid ad-

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Employment and Health Benefits: A Connection at Risk vances in genetic technologies for identifying individual risk for various diseases is making information available that could be used by insurers or employers to limit coverage for an ever-larger proportion of the population. Dispersed Power and Accountability It is in the nature of both voluntarism (as a mechanism for decisionmaking) and federalism (as a form of government) to disperse power, although the degree and nature of this dispersion can be quite variable. For example, the current structure of voluntarism in the health sector concentrates a great deal of discretion with the employer. It also leaves employers free to require employees to select insurance or show evidence of another source of coverage, and many employers do so in order to discourage adverse selection in the organization's health benefit program. Although the structure may not give as much discretion to the employee as to the employer, the employer may be in a better position than the individual to use its purchasing power to secure better prices, services, and disclosure of information from health plans. At their best, employers are available—and have a direct financial incentive—to act as ombudsmen for their employees and to support them in making informed decisions and resolving problems. Such assistance is less readily available to those with Medicare, Medicaid, or individually purchased private insurance. On the other hand, with power dispersed to organizations of vastly different sizes and resources, large purchasers have had much more leverage than small employers to negotiate with health care providers for discounts and other favorable payment arrangements. One consequence of this heterogeneity is a considerable amount of cost shifting, which occurs when providers are able to offset discounts or other reduced payments from some purchasers by increasing charges for smaller, weaker, less aware, or less concerned purchasers. Among governments, the power to regulate employee benefits is no longer delegated to the states but reserved for the federal government through ERISA. Because the federal government has, in practice, chosen to leave many important aspects of employee health benefits unregulated, the power to provide, negotiate, and restrict such benefits devolves to thousands of self-insured employers of widely differing competence, outlook, and accountability. Diversity Virtually every employer's program of health benefits differs from every other employer's program in some aspect (e.g., who is eligible for coverage, through what kinds of health plans, for which kinds of services, with

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Employment and Health Benefits: A Connection at Risk what level of employee cost sharing and other cost containment features, and at what overall cost). Although other nations vary substantially in the uniformity of their systems of health care, none appears to permit the degree of coverage, eligibility, and other variability seen in this country. Nonetheless, even amidst the microlevel diversity of the U.S. system of employment-based and public health coverage, specific patterns have developed that are associated with variations in employer size, region, industry, and other factors. In addition, voluntary efforts and government regulations have over time reduced some of the variability inherent in the U.S. system. Behind these patterns and trends, however, and certainly behind the broader generalizations offered in this report, lie substantial differences in the cost and quality of health benefits that may be quite important for individuals in need of care and for those who share in its financing. A change in employer policies or a change of job may bring better coverage, poorer coverage, or no coverage at all. It may bring more choice among health plans or less and more freedom or less to select or continue with a health care practitioner of one's own choosing. Although employers—especially smaller employers—do not necessarily provide choices for employees and some provide choices only because the HMO Act of 1973 mandated it, the interaction of employer and worker interests has certainly given Americans more health plan options than citizens in most or all other countries. On the provider side, the multiplication of health plan options and features has promoted diversity in the prices paid by different purchasers and, as described below, in the administrative practices with which providers have to comply. Innovativeness In addition to their diversity at a given point in time (and in part because of it), the design of employment-based health benefit plans is quite dynamic, inventive, and changeable over time. Compared to other nations, the United States has witnessed great innovation and entrepreneurship in the creation and marketing of health plans and coverage options and in the design or modification of cost containment and quality assurance strategies. For a variety of reasons, including generous government support, a large pool of talented researchers, and leadership from academic health centers and voluntary organizations, the United States is also a leader in clinical and health services research. Although their specific influence cannot be easily identified, the country's largest employers and unions have helped encourage certain fields of research, in particular, the devising of practical methods to measure health status and quality of care, to assess the benefits and costs associated with specific medical services, and to compare the performance of health care providers.

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Employment and Health Benefits: A Connection at Risk Innovativeness is widely viewed as positive, but the ultimate value of many health care innovations may be difficult to assess, particularly when individual and collective interests diverge. Some—such as flexible benefits, choice among health plans, expanded coverage of preventive services, and case management—are viewed positively by many employers and employees. A number of techniques and strategies developed in these areas are being carefully studied by other countries for possible implementation to help overcome their own problems with rising costs and ensuring good quality care. On the other hand, some innovations, such as health plan tactics to attract low-risk and avoid high-risk individuals, may have negative effects for many and for society as a whole. Some observers consider many innovations to be merely ''Band-Aids" for a flawed system or counterproductive steps for a society that should be concentrating on fundamental reforms. Discontinuity Although many of the above characteristics produce positive social products, they can also promote discontinuity of health coverage and health care. They are thus a mixed blessing. From one year to the next, an employer may add or drop health plans, increase or decrease the types of services covered, increase (but rarely cut) the level of employee cost sharing, change provider networks, or make other major and minor changes in the health benefits offered to employees. Some individuals lose some or all coverage when they voluntarily or involuntarily change jobs or move from welfare to working status. Others suffer "job lock" or "welfare lock" rather than voluntarily give up medical coverage. Sometimes financial protection is continuous, but the continuity of medical care may still be disrupted because a new job's health plan may require a change of health care practitioner. Such discontinuity of care for those with serious health problems is likely to become an increasingly urgent issue as more employers and health plans attempt to restrict individuals to defined networks of health care practitioners and providers, especially if they periodically drop and add networks. Through both their general commitment to universal coverage for basic health services and their national health plans or regulatory standards for sickness funds and similar organizations, other economically advanced countries generally limit the opportunity for changes in job status or employers' policies to interrupt care or coverage. Barriers to Cost Management Whether the measure is health spending as a percentage of the gross national product or spending per capita, the United States is noted for spending considerably more on health care than other nations. However, virtually all

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Employment and Health Benefits: A Connection at Risk lieve it is unrealistic to expect such good performance in these areas that all the costs of extending coverage could be offset. The magnitude of theoretical savings is even disputed. One step several committee members believe is both fair and budgetarily necessary is to limit the amount of an employer's premium contribution that can be excluded from an employee's income for tax purposes. Others oppose the removal of this specific subsidy, particularly as long as other subsidies they view as less socially constructive remain. These observations notwithstanding, the committee did not have the resources or charge to evaluate financing options in depth. It also saw the issues in this area as so intertwined with the broader health care reform agenda that detailed recommendations would go beyond the committee's charge. The committee, however, acknowledges that the changes discussed in this section—and the next—are unlikely as long as policymakers lack a realistic financing strategy that they feel is feasible politically. Furthermore, it may be important to consider employer reactions to health care reforms that limited employers' involvement in managing employee health benefits and assigned them only a voluntary or nonvoluntary financing role (e.g., a direct premium contribution or payroll tax). Employers might more vigorously oppose increases in their financial obligations for a health benefits program over which they had no control, and some might withdraw altogether from a voluntary role. Beyond Voluntary Coverage The above steps could encourage some employers that do not offer coverage to begin to do so and could help some workers afford coverage that is now beyond their reach. Some employers and workers, however, would still choose not to offer, purchase, or accept health coverage, even if substantial (but not total) subsidies were provided to assist vulnerable small employers and lower-income workers. For a majority of the committee members, therefore, an important finding is that these steps alone—difficult as they may be to achieve in today's environment—cannot significantly extend access or control biased risk selection. To do so, in the view of the majority of the committee, will almost certainly require that some form of compulsory and subsidized coverage be imposed on the employer, the employee, or both. In fact, without universal participation, the problems facing the small-group market could get even worse. One reason lies in a major limitation of a voluntary system that eliminates medical underwriting. That is, some individuals or groups would choose not to purchase coverage until faced with a health problem. Such behavior is like buying fire insurance while one's house is burning down or life insurance once terminal illness has been diagnosed. This hazard can be controlled by waiting periods and other medical underwriting, but the ma-

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Employment and Health Benefits: A Connection at Risk jority of this committee believes, on balance, that leaving individuals and families without coverage is not a desirable strategy, especially since low-income groups—absent near-total subsidies—are likely to be overrepresented in the excluded class. Furthermore, this report has already noted that those without coverage can generally obtain health care once a problem has become an emergency. Such care tends, however, to come late in the course of medical problems, many of which could have been prevented or treated more effectively with more timely care. It also tends not to be coordinated to meet other important but less immediately pressing health care needs. Moreover, because much care for the uninsured is written off as charity service or bad debt, health care providers seek to finance it by shifting the cost to other parties, particularly those who lack market leverage. Although some states have created special schemes (e.g., earmarked taxes on hospital services and regulated hospital rates) to help cover uncompensated care in hospitals and have established limited programs to provide primary and preventive care to the uninsured, this is a second-best strategy in the view of this committee—especially given the vulnerability of these schemes to ERISA challenges. Again, most members of this committee believe that extending health benefits is preferable on grounds of health and equity. Greatly different approaches are possible to implement compulsory and subsidized coverage, and calls for some form of mandated coverage are embedded in reform proposals that span the political spectrum. Not all would continue a significant role for the employers. For example, some strong advocates of market-oriented strategies urge a move toward mandatory individual purchase of insurance, some government subsidy for lower-income individuals, and an optional and limited role for employers. Others who advocate a strong government role favor a unified social insurance program that would make health coverage near-universal and compulsory and would largely restrict employers to a financing role. Both these approaches would resolve many of the complexities associated with mandated employer coverage, for example, treatment of different categories of workers (e.g., part-time, seasonal, free-lance) and discontinuity of specific benefits or sources of health care prompted by changes in job status. Depending on its specific features, an individual mandate could make universal the problems of risk selection now found in the individual purchase of insurance or it could attempt to control them through the kinds of features described in the preceding section. A unified national system following the Canadian model would eliminate risk selection by eliminating choice among health plans (but not choice among individual practitioners or providers). A national nonemployment-based program that allowed for choice among health plans would, however, require some mechanisms for controlling or compensating for selection.

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Employment and Health Benefits: A Connection at Risk Among the proposals that continue employment-based health benefits on some kind of mandated basis, specific approaches vary. Some would require employers to offer health benefits. Others would offer employers the option of providing coverage or contributing to some kind of public or quasi-public insurance program. Employer-based proposals vary in their attention to expanded coverage for those without a connection to the workplace or with a limited or episodic connection. The primary appeal of the proposals that provide a significant role for employment-based health benefits is that they would continue a familiar structure that is, in general, viewed favorably by most Americans. This structure provides many employees with an accessible source of information and assistance in making health plan choices and resolving problems. It encourages employer interest in the link between health care and worker productivity and well-being and the link between health spending and health outcomes. The major criticisms of employer mandates are that they would (1) impose too heavy an economic burden on businesses, particularly smaller businesses, (2) still leave uncovered many part-time, seasonal, or free-lance workers and their family members, (3) generally leave untouched the problems of complexity and discontinuity in specific benefits and sources of care that now arise during changes in individual job status, and (4) substitute the heavy hand of government regulation for the more efficient operation of competitive markets. An additional criticism is directed at one particular form of employer mandate, the so-called ''play or pay" proposal, which would give employers the choice of providing health coverage or paying a fixed amount (generally between 5 and 9 percent of payroll) to cover their employees under a public program. This "pay" feature would allow employers to cap their liability for health benefits. Depending on the size of the payroll contribution and other specific policy decisions, it could, however, leave the public program vulnerable to adverse selection and financing shortfalls if employers with more healthy employees choose to play (i.e., provide benefits) and employers with less healthy employees choose to pay (i.e., let the public program take over). Again, this committee does not take a specific position about broad options for health care reform. A form of mandatory employment-based health benefits is not the only option for extending coverage to more workers and their families, and committee members vary in their views about the feasibility and desirability of this option compared with others. This committee does, however, agree that the strengths of the current system should be appreciated and the potential for preserving these strengths while reducing the system's weaknesses should be thoughtfully considered. Although the combination of the steps described in this and the preceding section would address important weaknesses in the current system, they

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Employment and Health Benefits: A Connection at Risk would do nothing to control the rate of increase in health care spending or better ensure the value received in return for such spending. Committee members have quite different views on what cost containment strategies show potential for being effective, equitable, and compatible with good quality care and on whether these strategies should include an important role for employers. Because the committee could not undertake an evaluation of the cost containment potential of the many proposals for fundamental health care reform, this report must remain silent on a central issue in the debate over reform. As policymakers and others make judgments and define policies to influence health care costs, they should be guided by informed understanding of the systemic factors behind rapidly rising expenditures and a realistic sense that their proposed reforms can affect at least some of these factors and give the nation more confidence in the value received for its health care spending. Facing problems and trade-offs squarely will be an immense challenge for the policy process. Data analysis is helpful but limited and, in any case, not conclusive given that powerful interests and values are at stake. The nation's inability to decide whether access to basic health care and medical expense protection is a collective obligation or a private responsibility encourages impasse rather than action and rhetoric rather than reasoned problem solving. Surveys indicate considerable public misunderstanding of health care cost and access problems, and this misunderstanding could be a significant obstacle to change if not successfully addressed by a careful public education strategy. These constraints are reinforced by the oppressive persistence of large federal budget deficits, slow economic growth, and the view that effective cost controls must precede expanded access. The committee grants these difficulties, but it is, in general, a group of optimists who believe that this nation's policymakers and its citizens have met equal challenges in the past and can do so again. A FEW COMMENTS ON PRACTICAL AND TECHNICAL CHALLENGES As noted early in this chapter, the committee's findings and recommendations do not constitute a blueprint for reform but are rather a statement of some basic steps that appear necessary if employment-based health benefits are to play a more constructive social role. However, to be helpful to those not already involved in the "nuts and bolts" of drafting specific legislation, this section lists some practical questions that may need to be faced by state and federal policymakers and those who seek to advise or influence them. For any major changes, drafting specific legislative language and implementing regulations require that a great array of technical issues be resolved and matched to the objectives and scope of a particular proposal. Table 7.3

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Employment and Health Benefits: A Connection at Risk TABLE 7.3 Examples of Practical and Technical Issues in Drafting State or Federal Legislation and Regulations to Implement Major Changes in Employment-Based Health Benefits Definitions • What is the definition of an employer of record for part-time, seasonal, temporary workers? of workers with multiple jobs? of workers under age 65 who have retired from another job that provides post-retirement health benefits? • Should employers below a specific size (e.g., 500 lives) or employers operating in only one state be subject to state insurance regulation even if larger and multistate employers are not? • How are employer responsibilities for covering family members to be allocated when both spouses work and have similar or quite different coverage available? • How should employer fiduciary responsibilities be defined with respect to plan solvency? adequacy of coverage? continuity of coverage for specific services or conditions? mandated contributions to state reinsurance or high-risk pools? Underwritinga • Are waiting periods permissible before newly hired employees and their dependents become eligible for coverage? • If the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 for continued benefits to certain former employees and dependents are generally retained, should former employees be required to accept coverage if it is available when they accept a new job? • Should employers be permitted to adopt restrictions on coverage for a certain condition after an employee has developed that condition? Premium Contribution • Should a minimum contribution level be established for conventionally insured or self-insured employers? How should it relate to any public subsidy available for either the employer or the employee? • Should the employer contribution be the same for the employee and covered dependents? Should it vary by family size? by individual or family income? • What will be the basis for determining any minimum contribution (e.g., local, state, regional, or national medical care costs)? • Should a cap on administrative costs for individual health plans be established? • Should all or some of the employer contribution be taxed as income to the employee? If the current tax subsidy is capped, should the cap be expressed as a percentage of premium, a fixed dollar amount, or some portion of the cheapest plan's premium? Benefit Design • Should a basic benefit package be established? or a minimum and a standard package? If so, how? • Should deductibles and coinsurance rates be higher or lower than they generally are now or about the same? • What special characteristics of group or network health plans must be considered (e.g., cost sharing and coverage for in-network versus out-of-network care)? Should closed panel plans (only in-network coverage for nonemergency care) be more or less strongly encouraged?

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Employment and Health Benefits: A Connection at Risk Data Collection and Outcomes Measurement • Should uniform standards for data collection be defined for insured and self-insured health plans'? for determining health outcomes? • If employer access to claims and related information is restricted, is monitoring of compliance feasible? How will employee privacy be protected as electronic storage and transmission of medical records become commonplace? Relationship to Public Programs • Should coverage for employees with incomes that would otherwise make them eligible for Medicaid coverage be linked to the employer or to Medicaid? Can coverage responsibilities be shared? • Should self-insured employers be exempt from comprehensive state programs to restructure the health system and extend health benefits for most residents? a This assumes that many underwriting practices are eliminated, as described in the findings presented in Table 7.2. lists a selection of these issues or questions as background for those not already immersed in the intricacies of proposal drafting. Definitions or rules may be easy to draft for the great majority of people or situations to be covered by a proposal. For a minority of situations, rules may be highly contentious or their consequences uncertain. One such question involves coverage of domestic partners. A question that is almost as contentious and even more difficult technically involves how to allocate coverage responsibilities for families with children and both spouses working. The committee has already noted a number of areas in which amendments to ERISA would be helpful. With respect to Table 7.2, the committee further notes that ERISA is silent on most of these questions and yet precludes states from answering them. As states grapple with problems that have immediate and visible ramifications for their budgets and their citizens, this situation will become increasingly unsatisfactory. AGENDA FOR RESEARCH AND EVALUATION Implied or stated in the committee's findings are several important research questions, which are listed below. Some are already the subject of much attention, whereas others have, as yet, been little emphasized. Although not singled out below, other IOM reports (IOM 1989, 1990a, 1990b, 1992a) have identified other important priorities including, in particular, the need for continued research on (1) reliable and valid measurement of health status and well-being at both the individual and the aggregate level, (2) evaluation of the relative effectiveness and costliness of alternative strategies for

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Employment and Health Benefits: A Connection at Risk treating medical problems, and (3) development of clinical research strategies that better identify the effectiveness of services under real-world conditions, not just in highly controlled clinical trials. Progress in these areas will support research and policy in most if not all of the following areas. Methodologies for Risk Adjusting Payments to Health Plans A first priority is to continue public and private efforts to develop, refine, and pilot test risk measurement and payment adjustment techniques. These tests need to reflect the real-world environments in which the methods would be applied (e.g., government programs and small-group purchasing cooperatives). Committee members disagree about how good a risk adjuster must be (that is, how much variation in plan costs it can explain or predict), but all believe that existing techniques are insufficient. Some of the more robust adjusters (e.g., past use of health services and certain health status measures) may create undesirable incentives for health plans or be impractical to implement on a routine basis. Further refinements in these approaches may mitigate some of these problems. In general, a uniform approach to data collection and analysis is needed that meets actuarial and statistical standards and also serves quality improvement purposes. Methods that purport to risk adjust with a proprietary "black box" would not qualify unless their models were revealed. Consequences of Underwriting Reforms Plans should be developed to monitor the consequences of state or national reform in the small-group market and to simulate possible consequences of alternative reforms to guide eventual policy decisions. Underwriting reforms and community rating policies should not inadvertently undermine those insurers who have been willing to insure higher-risk individuals and who thereby have accumulated a risk pool that is more expensive than the community average. Although the reform proposals of the National Association of Insurance Commissioners are intended to deal with this problem, policymakers may benefit from monitoring of their adoption to detect possible unintended and unwanted consequences of particular policies. In addition, in-depth case studies of those few communities where some form of community rating is still significant might be useful. One objective would be to examine the conditions under which this practice has survived despite the presence of competing health plans and the absence of risk adjusted employer payments. Another would be to assess, if a plausible analytic strategy could be devised, whether overall health care costs and costs for low-risk and high-risk individuals or groups would have been lower or higher over the long term had community rating not existed.

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Employment and Health Benefits: A Connection at Risk Basic Benefits As noted in the preceding section, the committee endorses more research and analysis to support the definition of basic, standard, or minimum benefits. Such standardization, which is a feature of most health care reform proposals, could help discourage risk selection, reduce certain kinds of complexity, and better relate the cost of care to its value. At this time, however, proposals for reform vary substantially in the processes explicitly or implicitly envisioned for defining basic benefits, and different conceptualizations of the term are likewise evident. Some proposals emphasize preventive and primary care services that have relatively low unit prices and simple technology. Other discussions suggest that a basic benefit package is an "urgent care" package aimed primarily at the kinds of illness or injury that produce significant expenditures (a few days of hospital care) but not necessarily catastrophic expenditures (more than 30 or 60 days). Some proposals appear to start with the relatively broad range of services now covered by most health plans but then apply notions of appropriateness (medical benefit exceeds medical risk), relative cost-effectiveness (coverage to some cutoff point), importance as perceived by patients, potential patients, or physicians, and decency (lack of coverage would offend human decency). These issues are complex and could benefit from a careful and structured effort to outline and analyze the conceptual issues and the procedural issues raised by alternative approaches. The dimensions of the issues include consumer and patient preferences and capacities for decisionmaking; practitioner attitudes, behaviors, and capacities for decisionmaking; the state of technology assessment and the knowledge base concerning effectiveness and outcomes, including measures of health status; cost-effectiveness analysis; the state of the art in actuarial modeling to project the implications of alternative benefit packages; ethical perspectives; legal considerations; and administrative feasibility. Therefore, another research priority is an assessment of the evidence base and methodologies specified or implied by different proposals for standardizing health plan benefits, their potential to limit or exacerbate biased risk selection, and their likely impact on health care costs, health outcomes, and patient/consumer satisfaction. Employer Assistance with Employee Decisionmaking and Problem Resolution Employers can provide useful assistance to employees in making decisions among health plans, understanding and conforming to their requirements, and resolving problems. In assessing future policy choices, it would be helpful to know the extent to which employers do, in fact, assist employ-

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Employment and Health Benefits: A Connection at Risk ees in ways that might be difficult to recreate under other models (such as those that now exist for individual purchasers of health insurance, including Medicare supplemental benefits). Such models include consumer watchdog groups and senior citizen advisory services. Whether the purchasing cooperatives suggested for small employers could act as an advocate for employees needs further exploration. In general, the differences between the capacities of different-sized employers to manage benefits have not been adequately explored. Continuity of Care Individual choice of health care practitioner is becoming an increasingly important issue with respect to limited groups or networks of providers that may encourage continuity of care within the network but may disrupt care when individuals must move from one network to another. Such disruption may occur when a job change is made and the new and former employers offer different networks or when the same employer adds and drops networks over time. The incidence and clinical consequences of such disruption need investigation, particularly for the chronically ill and others at higher-risk of problems. Assuming that discontinuity in the patient-physician relationship does create significant problems for some patients, mechanisms to avoid or compensate for such problems also need to be tested. The open-ended HMO or point-of-service plan is one mechanism that might allow continuation of patient-physician relationships across separate networks, but the extent to which such plans actually facilitate continuity of care is untested. It is reasonable to expect that such systems might affect low-and high-income individuals differently and that their impacts would vary depending on the required extra cost sharing, particularly the maximum out-of-pocket spending. Another approach that might foster continuity of care is included in some reform proposals that would establish a certification system for health plans and require that employers offer all approved plans to their employees. If employers may offer only a subset of approved plans, then some continuity of care problems would likely continue. The amount of discretion that employers might retain concerning their health benefit program under the "offer all" approach is not clear. Currently, when employers drop and add network health plans, they may work with the plans to ease the transition for some patients, such as those who are pregnant and whose obstetrician is not part of the new network. Such arrangements would be considerably more difficult to arrange and maintain for those with long-term, expensive problems, but research on the design and financing of such arrangements should be considered.

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Employment and Health Benefits: A Connection at Risk FINAL THOUGHTS As noted throughout this report, the United States is unique in its reliance on employers to provide voluntarily health benefits for workers and their family members. This constantly evolving arrangement has its pluses and minuses, although the limitations of the system are becoming considerably more visible and worrisome. In particular, the dynamics of risk segmentation, the potential for increased discrimination, the persistence of millions of uncovered individuals through economic upturns and downturns alike, and the increasing complexity generated by employer—and government—cost containment efforts have led to many proposals for health care reform. Some retain a central role for employment-based health benefits— voluntary or mandatory—whereas others eliminate them (or relegate them to a minor position) in favor of a government health plan or a market for individually purchased insurance. As the details of specific proposals are emerging and being subjected to increasing critique and analysis, the arguments about their particular characteristics, expected consequences, and apparent trade-offs are growing more specific. Do employment-based health benefits offer sufficient "value added" that reforms in the U.S. health care system should continue—indeed mandate—them even if some important limitations of the system cannot be fully corrected by such reforms? Each member of the committee has a somewhat different answer to this question, one affected to varying degrees by the practical reality that this system is what is in place and is familiar and valuable to most Americans. Nonetheless, most foresee a continued deterioration in the quality and scope of health coverage unless major steps are taken to reduce or correct serious weaknesses in the system. Most believe it unlikely that more small employers could voluntarily and independently provide the coverage and assistance offered by large employers. Overall, policymakers and reform proponents of all stripes may both overstate and understate the advantages and disadvantages of current arrangements, a circumstance made easy by the diversity of these arrangements. Despite the diversity of its views on specific directions for health care reform and the role of the employer, the committee would not like to see lost the assistance that employers can bring to employees facing problems with their health coverage. Because neither a single national system nor a competitive market based on individual (not employer) choice would be perfect, employers might—given either scheme—very well see advantages in a new kind of "employee assistance program" or fringe benefit that would provide employees with assistance and explanation of their health plan coverage or help in resolving problems with denied claims, bureaucratic inertia, or whatever similar difficulties a reformed system might present. Furthermore, the committee would not like to see employers uncon-

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Employment and Health Benefits: A Connection at Risk cerned about the link between health coverage, health status, and worker well-being and uninterested in efforts to improve assessments of the cost-effectiveness of specific medical services and health care providers. Because workplace and community health promotion programs, local health care initiatives and institutions, and other health-related activities have attracted employees' and employers' support for reasons beyond any specific tie to their health benefit programs, continued support can be expected and fostered. Given the creativity shown by both public and private sectors in the past and the considerable accomplishments of employment-based health benefits, there is reason to be optimistic that decisionmakers—if they can agree on a basic framework for reform—can find a positive role for employers. That role may be larger or smaller than it is today, but in either case it should be designed to support the country's broad objective of securing broader and more equitable access to more appropriate health care at a more reasonable cost. SUPPLEMENTARY STATEMENT OF A COMMITTEE MEMBER John K. Roberts, Jr. Health insurance is based on the concept of risk sharing. If individuals are allowed to wait until they get sick or injured to purchase insurance, then there is no risk sharing and the insurance mechanism breaks down. This is a concern, particularly in the individual and small group markets, where the insurance buying decision is more likely to be based on current needs for medical care. Individual underwriting and pre-existing condition limitations serve as incentives for individuals to purchase insurance while they are still healthy. If these tools are to be eliminated, they must be replaced by other means of assuring a broad spread of risk. Further, the result of the recommendations as outlined would be to increase the cost of insurance protection for many. This, in turn, will likely result in fewer people—not more—being able to afford insurance coverage, producing a result exactly opposite that intended by the recommendations.