1. Of Once and Future Kings: The Future of Employer-Sponsored Health Insurance Len M. Nichols, Ph.D., Vice President Center for Studying Health System Change* for Leonard Davis Institute Seminar March 11, 2005

2. Overview Divergent views on ESI Divergent views on ESI Coverage levels and trends Coverage levels and trends Affordability trends Affordability trends Offer, eligibility, and take-up trends Offer, eligibility, and take-up trends Reasons for persistence of ESI Reasons for persistence of ESI Likely trajectories Likely trajectories Policy options Policy options

3. Divergent Views of ESI Left critique and preference Right critique and preference California’s SB 2 and voters’ split Employers’ laments, plans’ and providers’ fears

4. Sources of Coverage non-elderly population, 2003 Employer63.4% Public11.9% None15.0% Source: CTS Household Survey, 2003

5. ESI Coverage Trends 198719932002 US70.1%64.3%64.2% CA61.0%53.2%59.6% Source: US data, Fronstin, EBRI, December 2003; CA data, authors estimates using CPS.

6. Affordability Trends ECI of BLS: ECI of BLS: –Real wage growth since 1980: 10.8% –Real benefit cost growth since 1980: 49.4% Health insurance share of total private compensation Health insurance share of total private compensation »19995.4% »20046.6% »(note: 1993-4)6.6 and 6.7% Source: BLS

7. Compensation of Employees as a Percent of GDP SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts. 51.8% 0.7% 3.8% 6.3% 3.6% 47.5%

8. HI Share of compensation for workers who accept ESI BLS NCS data suggests 6.6% for average worker BLS NCS data suggests 6.6% for average worker 88% are in offering firms 88% are in offering firms 77% of those are eligible 77% of those are eligible 81% of eligible take their employer’s offer 81% of eligible take their employer’s offer => 6.6/.55 = 12% of compensation for workers who accept ESI => 6.6/.55 = 12% of compensation for workers who accept ESI Source: BLS on compensation shares, MEPS-IC on offer/eligibility/take-up percentages

9. Hourly Cost of Family Health Insurance as a percent of hourly wage levels 199820012003 25 th percentile wage33.2%38.7%47.1% Median wage22.4%27.6%32.6% Mean wage17.9%21.9%25.7% Source: premiums from KFF/HRET surveys, wages from NCS of BLS.

10. Family premium / median wage of selected occupations Median wagefamily premium/median wage Physician$60.10 7.3% History Professor$27.6315.8% LPN$16.1826.9% Secretary$15.0029.1% Bank teller$ 9.9343.9% Cook$ 8.7549.8% Source: premiums from MEPS-IC, wages from BLS, 2002.

11. Offer, Eligibility, and Take-up Trends 199619992002 In firms that offer to some86.5%89.1%88.3% Eligible81.3%78.5%77.1% Take-up among eligible85.5%82.3%81.0% Source: MEPS-IC, various years.

12. ESI Coverage Trends, by Income 198719932002 All66.3%60.4%65.0% < poverty13.9%11.7%16.5% 1-2*poverty48.5%43.0%41.9% 2-4*poverty76.0%72.0%71.4% >4*poverty85.7%82.3%85.6% Source: Author’s analysis of CPS data.

13. Why Does ESI Persist? Tax preferences Tax preferences Economies of scale Economies of scale –Risk pooling –Administrative –Provider price discounts Econs of scale alone => offering firms would have to pay more to make worker whole than they have to extract in wages to “contribute” to premiums Econs of scale alone => offering firms would have to pay more to make worker whole than they have to extract in wages to “contribute” to premiums

14. Distribution of Tax Subsidy Rates Tax subsidy ratepercent of workers < 10% 5.5% 10-25%11.2% 25-30%38.1% 30-40%39.3% > 40% 5.9% Source: author’s analysis using CPS workers and NBER’s TAXSIM program, for 2002.

15. Implications of Persistence ESI system still works well for higher wage workers ESI system still works well for higher wage workers Lower wage workers with offers were “lucky” when health care was cheap Lower wage workers with offers were “lucky” when health care was cheap Forces for workforce segmentation are growing Forces for workforce segmentation are growing –outsourcing / more efficient production processes –rising health care costs

16. Is ESI in Crisis? No, but stress fractures trace income lines No, but stress fractures trace income lines Are higher wage workers less willing to subsidize lower income co-workers? Neighbors? Strangers? Are higher wage workers less willing to subsidize lower income co-workers? Neighbors? Strangers? Should co-workers or neighbors bear the costs of the unfortunate alone? Should co-workers or neighbors bear the costs of the unfortunate alone?

17. What Can Policy Do About These Trends? Not much, forces for segmentation are global capitalism, and we like that (at Wharton, anyway) Not much, forces for segmentation are global capitalism, and we like that (at Wharton, anyway) Still,… Still,… –Failure to subsidize => Dickensian America –Failure to rein in cost growth while subsidizing => overtaxed America SO? SO? –Assess technology prior to coverage –Set tax cap at EBM-based benefit packages –Use Medicare monopsony power to create information systems –Subsidize our fellow workers’ access to health care