Health Reform Transitions: Reasons for and How To Help Employers Go Gently Into That Good Night Len M. Nichols, Ph.D. Director, Health Policy Program New America Foundation Alliance for Health Reform Briefing Washington, DC September 21, 2007

2 Overview Why Now Visions and Nightmares Facts and arguments for your consideration Pathway to a Future

3 Percent of median family income required to buy family health insurance Source: Author’s calculations, using KFF and AHRQ premium data, CPS income data.

4 Premium Payments v. GDP Growth Rate Source: NIPA, BEA/Commerce Dept.

5

6 Percent of Employees with Employer Sponsored Insurance at Firms with Fewer Than 50 Employees Source: AHRQ/MEPS-IC data, various years.

7 Percent of Employees with Employer Sponsored Insurance at Firms with More Than 50 Employees Source: AHRQ/MEPS-IC data, various years.

8 What’s Different Than Premium / Income is far higher International competition is more pervasive More awareness of spotty quality, low value per dollar Stresses appear more unsustainable and more risky to more people

9 Visions and Nightmares FREE markets Single Payer Individual + Shared Responsibility Unregulated insurance markets Rationing bureaucrats Complex regulations in sheep’s clothing

10 What Do … Have in Common? Romney (in MA), Schwarzenegger, Edwards, Clinton, Wyden-Bennett, Federation of American Hospitals, ERISA Industry Committee? Individual + Shared Responsibility ! –Cover Everyone –Build new marketplaces –Centrality of individual responsibility –Employer as ONE of many financing sources –Focus on long run cost growth containment/value enhancement

11 Why Employers Should Transition Out Competitiveness Economists say, “no problem” CEOs say, “BIG problem”

12 Employer Contribution Rates and Hourly Cost of Health Benefits, Selected Top Trading Partners Country (rank in total trade with the US, 2005) Employer Contribution Rate Hourly Pay, Manufacturing U.S. dollars, 2005 Hourly Cost of Health Benefits, Manufacturing US dollars, 2005 United States 11.3% (March 2007) 13.0% for Manufacturing $18.32$2.38 Canada (1)4.5%*$19.21$0.86 Japan (4)3.74%$18.06$0.68 Germany (5)6.65%**$25.53$1.70 United Kingdom (6) 1.92%***$20.91$0.40 France (9)12.8%****$16.93$2.17 Weighted average4.9%$19.79$0.96

13 Sources Analysis and calculations are from a forthcoming paper by Len Nichols and Topher Spiro, “Employer Health Costs in a Global Economy: A Competitive Disadvantage for U.S. Firms,” The New America Foundation. Data for the “Relative Unit Health Costs of Selected Industries” comes from: –The Relative Unit Health Costs is calculated as employer premium contributions divided by value added (net output). –Data on employer premium contributions by industry is from the Agency for Healthcare Research and Quality (2004) –Data on value added by industry is from the U.S. Department of Commerce, Bureau of Economic Analysis (2004). Data for the “Employer Contribution Rates and Hourly Health Cost of Health Benefits…” comes from: –U.S. Census Bureau, Foreign Trade Division. –International Social Security Association, Social Security Programs Throughout the World, 2005(Canada) and 2006 (all other countries). –Bureau of Labor Statistics, International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing, November –* Maximum, varies by province, ** Also finances cash sickness and maternity benefits, *** 15% of 12.8% employer contribution is allocated to the National Health Service, ****Also finances cash sickness, cash maternity, disability, and survivor benefits.

14 Burden is NOT being fully shifted Theory works in long run equilibrium Labor market norms and competition prevent complete backward shifting into wages in the short run Health cost growth > general inflation + productivity, and by large amounts each year => we never get to long run eq. International competition constrains forward shifting into prices IF employer burden were zero: –They would not be dropping coverage, reducing benefits, reducing employer share, increasing employee/patient cost-sharing –Leading employers would not be supportive of comprehensive reform Wal-Mart, BRT, CED, ERIC, Safeway, etc.

15 Why Employers Should Transition Out Competitiveness Financing easier –Tax exclusion is BIG money Portability Comparative Advantage (see next slide) Political philosophy of personal responsibility

16 Relative Unit Health Costs of Selected Industries Column A Active Workers Only Average=100 Column B Active Workers and retirees All industries Manufacturing Retail Trade Wholesale Trade Transportation and Warehousing Information Accommodation and food services

17 Pathway to a Better Future Build a new marketplace that works for all Coverage becomes de-linked from place of employment Finance income-based subsidies any way you want Use exchange / marketplace rules to drive competition to health insurance arrangement that adds the most clinical value rather than selects the best risks