Employer-Sponsored Health Insurance Importance, Options, and Issues Jeanne M. Lambrew, PhD Associate Professor LBJ School of Public Affairs, University of Texas Senior Fellow, Center for American Progress September 26, 2008

IMPORTANCE As a Source of Insurance Spreads Out Risk –Job choices are rarely about health benefits –Most with job-based insurance are in large firms Leverages Demand –Greater negotiation power with strong providers –Innovates in delivery system organization Keeps Administrative Costs Low –Economies of scale –No underwriting, marketing –Easy collection of premiums 2

Effects of Firm Size Firm SizeAdults Covered Administrative Costs <10 8% 48% % 25% % 20% % 16% % 13% % 10% Public Employees 19% -- 3 Sources: EBRI analysis of 2008 CPS; JCT analysis of Bush health insurance tax deduction plan

As an Agent for Workers Reflects workers preferences –Part of attracting and retaining labor –Balance cost with sought-after benefits Employers care about cost, insurers about risk Benefits have changed to reflect what people want Makes enrollment easy –Lowers time for workers to find health plans Most employers are trusted –Payroll deduction simplifies premium payment Employer contribution excluded from taxes –Worker benefits from pre-tax employer payments 4

As a Source of Financing Tax break leverages employer contribution –$200 billion in tax breaks contribute to: Over $500 billion in employer contributions Around $200 in employee contributions Employer contribution acts like a payroll assessment : Most people unaware of it –May decrease awareness of premiums –May increase insurance coverage compared to paying out of pocket System facilitates premium collection –Administrative costs would climb if insurers had to collect premiums directly from workers 5

OPTIONS Strengthening Employer Coverage Employer requirement Employer pay or play –Pay: Typically a payroll tax, could be a percent of premiums –Play: What constitute minimums Individual requirement –Increases take-up of employer coverage, according to Massachusetts experience 6

Preserving Elements of Employer Coverage Financing –Corporate tax –Payroll tax Pooling –Workers access pool options via employers Facilitating coverage –Employers deduct health premiums from wages –Employers arrange for health plan choices without sponsoring them 7

ISSUES Small businesses face special challenges Alternatives to employer system needed –Many have loose labor-force attachment –Employment patterns changing Alternatives matter –Eligibility rules –Generosity of benefits, premium affordability Reminder that large firm coverage functions: –Better than small group and non-group coverage –Similar to large public programs 8