The Future of Employer Sponsored Health Insurance

1. The Future of Employer Sponsored Health Insurance Michael A. Morrisey, Ph.D. Lister Hill Center for Health Policy University of Alabama at Birmingham Alliance for Health Reform Washington, DC September 26, 2008

2. The Story Employer sponsored health insurance (ESHI) is not going away anytime soon … but how it is provided will change significantly

3. Modern Insurance Does Two Things • It reduces the financial risk of big, costly relatively rare health events • It negotiates lower prices for health services • Arguably lower prices than we can get ourselves

4. More Catastrophic-Type Coverage • As premiums increase employers & employees will try to conserve on coverage – giving up the coverage they value least • Switch to cheaper plans • Drop coverage for lesser valued & routine services • Seek higher copays & deductibles

5. More & Different Selective Contracting • Selective contracting has a track record of effectiveness in lowering the price of health services • Trading volume for price • We will see: • More narrow panel managed care • Discounts on drugs & physician visits

6. Resurgence of Tighter Provider Networks • HMOs but with much less gatekeeping and less utilization management • …but greater reliance on selective contracting

7. “Discounts” in Many Forms • Discount card • Provided by the insurer who offers ESHI • Provided by a health services provider • See the merger of Caremark and CVS • Aggressive pricing • Wal-Mart's $4 prescriptions & $9 diabetes supplies • Retail-outlet health services providers • Routine, chronic, preventive

8. Better Tailored Coverage for Single & Two-Earner Households • Two-earner households don’t want two insurance plans • Have much larger out-of-pocket insurance premiums • “Gross up” wages and salaries • Allows workers to have both coverage & higher wages

9. Salience of Insurance Premiums • Many workers view the “price of ESHI” as the amount they have to pay out-of-pocket • But the wages given up are based on the full premium • If they see the full premium as their money they will choose more carefully about what insurance coverage they value

10. Neoclassicists vs. Behavioralists • When Going to the Store … • Neoclassicists • People understand that they will pay 7% sales tax and will incorporate this into the posted prices they see – and buy less • Behavioralists • It is the posted price that is salient to people and they make their decisions based on this price and overlook the sales tax

11. Higher Wages and Full Price Menu of Health Insurance Options • If the Behavioralists are right, then the salience of the full price menu will induce people to: • Switch to cheaper existing plans • Seek higher copays & deductibles • Drop lesser valued & routine coverages

12. The Future of ESHI - Summary • Short-Run • More catastrophic-type coverage • “Discount cards” – price cuts to consumers • Greater use of selective contracting • Longer-Run • Wages “grossed up” & higher out-of-pocket premiums • Salience of the full insurance premium

13. What Can Congress Do? • Maintain choice • Employers have seen that one size doesn’t fit all • Implement a Tax-Cap on ESHI • To reduce the incentive for the middle & high income to over-insure • Replace the Tax-Cap with a Tax Credit • To enhance incentives for the low income to buy coverage • Perhaps income or health status adjusted