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

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

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

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

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

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

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

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

Salience of Insurance Premiums Many workers view the “price of ESHI” as the amount they have to pay out-of-pocket 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 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 If they see the full premium as their money they will choose more carefully about what insurance coverage they value

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

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: If the Behavioralists are right, then the salience of the full price menu will induce people to: Switch to cheaper existing plans Switch to cheaper existing plans Seek higher copays & deductibles Seek higher copays & deductibles Drop lesser valued & routine coverages Drop lesser valued & routine coverages

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

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