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

7.3

16.8

0

2

4

6

8

10

12

14

16

18

1987 2006

Source: Author’s calculations, using KFF and AHRQ premium data, CPS income data.

4

Premium Payments v. GDP Growth Rate

0%

2%

4%

6%

8%

10%

12%

14%

1999 2000 2001 2002 2003 2004 2005 2006

esigdp

Source: NIPA, BEA/Commerce Dept.

5

6

Percent of Employees with Employer Sponsored Insurance at Firms with Fewer Than 50 Employees

67.8%

78.8%

62.1% 62.2%

78.0%

60.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

2000 2005

Offered InsuranceEligible for InsuranceEnrolled in Insurance

Source: AHRQ/MEPS-IC data, various years.

7

Percent of Employees with Employer Sponsored Insurance at Firms with More Than 50 Employees

98.1%

78.9%

64.6%

96.4%

78.6%

63.0%

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

100.0%

2000 2005

Offered InsuranceEligible for InsuranceEnrolled in Insurance

Source: AHRQ/MEPS-IC data, various years.

8

What’s Different Than 1993-94

• 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 PartnersCountry

(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 average 4.9% $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 2006.

– * 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.

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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 100.0 106.8Manufacturing 123.5 138.8Retail Trade 104.1 105.8Wholesale Trade 96.3 100.0Transportation and Warehousing

140.6 152.1

Information 103.1 122.9Accommodation and food services

111.0 114.8

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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