By Sandy Lutz, Benjamin Isgur, and Jeffrey Gartland
What election-year healthcare reform proposals mean for the future of employer-sponsored health insurance
As the presidential campaign reaches a fever pitch, candidates on both sides of the aisle are promulgating their positions on everything from fiscal policy to the war in Iraq. One of the most closely followed public debates centers on healthcare reform. Although all voters have a vested interest in the discussion, voters who are also employers may be most affected by its outcome.
If you are an employer, spiraling healthcare costs are eating
away at your bottom line. According to the US Census Bureau,
177 million Americans rely on employer-sponsored insurance for their health coverage. At 16 percent of the US economy and growing, healthcare is big business—maybe even your business. Moreover, the health plan options companies offer have become key factors in employee recruitment and retention. Current (and prospective) employees are asking a number of questions. How comprehensive is the existing coverage? How many choices
do I have? How much is it costing (going to cost) me? Can I do better elsewhere?
It’s no wonder, then, that healthcare consistently ranks as one of the top domestic policy issues on the minds of Americans and that during election years healthcare policy becomes a focal point. (See Figure 1, next page.) Employers, employees, and politicians alike agree that the system is not sustainable and that there is no clear path ahead. As one might expect, Democrats differ from Republicans in their respective approaches to healthcare reform. Generally, Democrats favor broader and more immediate changes through legislation, while their Republican counterparts focus primarily on changes to tax policy as the means of transforming the system.
However, all of the major candidates agree that a single-payer model is not tenable and that going forward, our healthcare system will continue to be a public-private partnership. Just what that partnership will look like is the key question. And top of mind for employers is cutting through the election-year hype and determining what it really means to the future of their businesses.
Healthcare spending has been increasing at about twice the rate of inflation, absorbing a larger and larger share of both employers’ profits and workers’ salaries. (See Figure 2.) For employees, healthcare cost is the top financial concern facing American families, ranking higher than home ownership, energy costs, debt, retirement savings, and college expenses, according to a recent Gallup Poll.1 The problem is compounded because the high cost of healthcare in the United States is directly related to growth in the number of uninsured people, especially when premium increases exceed personal income growth, thus making insurance less affordable.2
For US businesses, too, the significant cost of healthcare is a major concern,
particularly when one considers that while just 61 percent of US businesses offer health insurance to at least some employees, a whopping 98 percent of large businesses (those with 200 or more workers) do the same.3 Employers typically spend upwards of 10 percent of payroll on health insurance for their workers. (See Figure 3.) Taken in aggregate, that’s a huge number—nearly $600 billion, according to the US Department of Commerce’s Bureau of Economic Analysis. (cont'd below)
Figure 1: America’s big concern Percent of Americans surveyed, citing healthcare as the nation’s most important problem
Source: PricewaterhouseCoopers, Beyond the Sound Bite, 2007, based upon PwC Health Research Institute analysis of Gallup’s Most Important Problem series, October 11-14, 1990 through September 14-16, 2007
Figure 2: Healthcare’s growing share of consumer spending Percent change in wallet share of personal consumption components
Source: PricewaterhouseCoopers, Beyond the Sound Bite, 2007, based upon PwC Health Research Institute analysis of data from the Bureau of Economic Analysis,
“Personal Consumption Components,” 2007
Figure 3: Rising employer healthcare costs Employer premium contributions as a share of payroll
Source: Bureau of Labor Statistics’ Research Data Center, Employment Cost Index, data accessed from February 2006 to April 2007
Figure 4: Health insurance trumps pay increases Percent of respondents who would rather have $6,700 in employer-sponsored health insurance—
the average amount spent by employers on each employee at the time of the survey—over the same amount in additional taxable income
Source: R. Helman and P. Fronstin, 2006 Health Confidence Survey: Dissatisfaction with Health Care System Doubles Since 1998, EBRI (Employee Benefit Research Institute) Notes, vol. 27, no. 11, November 2006, and earlier publications based on the EBRI Health Confidence Survey
It wasn’t always that way. Employer-sponsored insurance was introduced during World War II as a relatively inexpensive way to recruit and retain employees in a tight labor market where wages were frozen
by the federal government. Americans quickly became accustomed to healthcare coverage as a benefit of employment. They have also gotten used to the favorable tax treatment of employer-sponsored insurance benefits under current law, in which the premiums are excluded from their income for tax and payroll purposes. In fact, one recent study found that employees
would rather receive thousands of dollars in employer-sponsored insurance benefits than the same amount in additional salary. (See Figure 4.)
The future course for employer-sponsored insurance may depend largely on the policies initiated by the next president of the United States. A new leader will help decide important policy questions concerning covering the uninsured, improving the quality of care, and using taxes and other mechanisms to fund coverage. Proposals run the gamut from mandating that all employers provide coverage to doing away with employer responsibility altogether. The major differences among the possible approaches involve the following broad categories: employer mandates, government and worker responsibility,
retiree coverage, tax policy, market reforms, and cost control.
Pay, play—or no way
According to our analysis of US Census Bureau data, 47 million Americans—more than 15 percent of the population—do not have health insurance. Of those, a full two-thirds have a connection to a full-time job; that is, they either hold full-time jobs or are dependents of those who do. Given these statistics, it is not surprising that both of the major political parties consider addressing the working uninsured to be a high priority.
To expand access to care, proposals from the leading Democratic candidates require employers to provide worker health coverage. This approach, often referred to as pay or play, encourages employers to fund employee health insurance by taxing employers that do not.
The Democratic mandates strengthen and expand the employer’s role in the healthcare market. Today, however, many large companies agree that employers must offer a minimum level of coverage. In a recent PricewaterhouseCoopers survey, 150 US executives at large, publicly held companies agree, with 87 percent rejecting the notion that employers should not provide such coverage. (See Figure 5.)
Since 2005, 31 states have proposed
a form of pay or play, and employer mandates have already been enacted in Hawaii, Massachusetts, and Vermont.
(See Figure 6.) In Massachusetts, employers with at least 10 workers pay each worker $295 per year if they do not make a “fair and reasonable” contribution to the cost of workers’ coverage. In this case,
fair and reasonable means either enrolling
25 percent or more of full-time equivalents (FTEs) in the employer’s plan or offering to pay at least 33 percent of FTEs’ premiums.
The mandate proposals generally establish a minimum employer contribution. For example, if an employer currently pays at least 6 percent of payroll costs toward employee health insurance, the employer would be exempt from any further contribution. If the employer provides no health insurance or pays less than 6 percent of payroll, the employer would have to contribute to a public pool that brings the total contribution up to 6 percent of payroll. The public pool would then subsidize coverage for the uninsured.
Generally speaking, Republicans do not support this approach. They oppose additional federal regulations on the health industry and specifically reject mandates. They counter that an employer mandate may not be effective unless the penalty is high enough to make purchasing coverage attractive. Some critics add that mandates might cause employers to hire more part-time or temporary workers who would not be subject to mandates.
Figure 5: Employer attitudes changing on providing coverage
Percent of respondents who say employers should move away from providing healthcare coverage for active employees
PricewaterhouseCoopers Health Research Institute, Tailoring the approach: Employer attitudes and healthcare strategies address distinct issues, 2007
Figure 6: Overview of existing state employer mandates
Changing government and worker roles
Bolstering or diminishing the employer’s role in healthcare is just one lever that is being used to address healthcare reform. How the parties see the responsibility of the federal government and the responsibility of individuals is another key issue that also gets at the problem—and directly impacts employers.
Democrats generally favor expanding government programs such as Medicaid and the State Children’s Health Insurance Program (SCHIP). Many support a new government-sponsored health insurance program wherein individuals could purchase coverage. This could benefit health plans if the program were structured like the Medicare drug benefit, which is paid for by the government and administered by private plans. Other Democratic proposals
include (1) a new government health insurance option wherein individuals could purchase coverage (the program would be modeled after Medicare but not funded through the Medicare trust fund); (2) a new program that would mirror the Federal Employees Health Benefits Program and make the same private insurance options enjoyed by federal employees available
to all Americans; and (3) the development of a national health insurance exchange that would set standards for participating
plans and facilitate the purchasing of
individual coverage.
Republicans support proposals that would strengthen the individual insurance market by extending to that market some of the
favorable tax treatment that is currently
available only for employer-group coverage. Strengthening the individual market
would not only provide tax support for people who do not have access to employer coverage; it would also offer more insurance-product choices to employees who currently are limited to just one or two health plans. Also, Republicans tend to believe that existing government programs are underutilized. Rather than expanding government programs, leading
Republicans would prefer that the government focus on enrolling uninsured Americans who are eligible for Medicaid and for SCHIP but who haven’t signed up.
Both parties advocate changing the individual’s role in the healthcare system. Democrats would start with an individual mandate—that is, with a requirement that individuals procure health insurance similar to the requirement in many states that individuals procure automobile insurance. An individual mandate could coexist with an employer mandate, potentially offering workers affordable coverage options both through their employers and in the individual market. Individual mandates could be supported by new rules like guaranteed insurability and community rating, which consist of pricing everyone in a given geography the same, thereby creating a large pool that spreads the risk. Together, guaranteed insurability and community rating facilitate portability of insurance—something both parties agree on. A variation on this approach involves an individual mandate only for children that is supported through expanded government programs.
Republicans oppose individual as well as employer mandates. They argue that an individual mandate may not be effective unless it is coupled with a severe penalty for those who do not enroll in a plan. For example, in Massachusetts—a state that currently has an individual mandate—the penalty is loss of the individual exemption. However, the value of the $3,500 tax exemption ranges from $0 (for lower-income individuals not paying taxes) to $1,225 (for individuals in the 35 percent tax bracket). Given that the average annual premium cost of single coverage exceeds $4,000, the penalty might not encourage many of the uninsured to purchase insurance. In practice, a mandate would likely be limited to those who can reasonably be expected to afford private health insurance. Unless significant subsidies are provided for middle-income uninsured people, such individuals cannot afford to purchase the level of insurance provided by employers—a level that commonly approaches annual family premiums of $15,000 or more.
Whichever coverage proposals prevail, they will affect employers. On one hand, public-plan options may crowd out private insurance if insured individuals drop their private coverage in favor of less expensive government coverage. Or employers—especially employers of low-wage workers—may decide not to offer insurance when public alternatives are readily available. On the other hand, any plan that covers more people may have the effect
of lowering overall insurance premiums,
a trend that could benefit employers.
An individual mandate could coexist with an employer mandate, potentially offering workers affordable coverage options both through their employers and in the individual market.
The retiree dilemma
Covering active workers and their dependents is one thing, but what about the burden of providing coverage for retirees? Even employers that believe they have a responsibility to provide health coverage access for retirees also feel there are limits to that responsibility. In a recent PwC survey, employers were less than certain about their future support for retiree health coverage. When asked to describe their views on the topic, nearly three-quarters said retiree health coverage is placing financial pressure on companies and that such coverage will need to be changed through reduced employer contributions and benefit caps. However, employers
do show strong support for assisting employees in managing their own
retirement health and associated costs. For example, nearly 80 percent support providing retirees with savings account mechanisms, tax incentives, and access
to coverage even if they do not fund it. (See Figure 7.)
The parties’ proposals on retiree healthcare closely mirror their positions on increasing healthcare coverage in general. The
Democrats would bring retirees into the system either by expanding existing programs,
by prepurchasing retiree healthcare coverage, or by using health markets to increase access. The Republicans favor tax incentives through the expansion or modification of health savings accounts (HSAs).
Figure 7: Employer attitudes on retiree health coverage
In describing your views about retiree health coverage, do you agree at least somewhat with the following statements?
Source: PricewaterhouseCoopers Health Research Institute, Tailoring the approach: Employer attitudes and healthcare strategies address distinct issues, 2007
Tax reformers and market makers
Instead of employer or individual mandates, Republicans generally support changes
to tax policy to stimulate a more robust individual insurance market. Their theory
is that with attractive rates and policies, individual consumers—especially those who are currently uninsured—can secure
their own, affordable policies without help from employers. This approach weakens the connection between insurance
and employment.
The Republican plans extend the approach that President George W. Bush proposed in his fiscal year 2008 budget: Contributions to employer-sponsored insurance are included in wages and therefore subject to income and payroll taxes. In exchange, the president’s proposal would provide a standard deduction of $7,500 for all insured individuals and $15,000 for insured families. By eliminating the tax advantages associated with employer-sponsored insurance, the president’s proposal would make individual coverage more attractive and begin to disentangle health insurance
from employment.
Under the Republican plan, people
who purchase coverage costing less than the deduction amounts would still receive the full value of the deduction, which could influence individuals to shop for the most basic coverage. However, the proposal would offer few incentives to low-income earners who have no or little tax income liability. The administration estimated that its proposal would reduce the number of uninsured by 3 million. Critics, however, argue that employer-purchased insurance might continue to enjoy an advantage over individually purchased policies because of more favorable pricing based on employer purchasing power.
Republicans favor expanding HSAs,
which let individuals earmark tax-exempt contributions for healthcare.
By increasing contribution limits, they hope to entice more individuals to
purchase insurance. Some also favor doing away with high-deductible
requirements for HSAs, which would
also make the plans more attractive.
Opponents say the impact of such HSA changes would likely be modest, based
on how changes have been received
since their inception a few years ago.
The HSA-eligible, high-deductible-health-plan option has attracted about 4.5 million Americans, about one-fourth of whom previously were uninsured.4 However,
only about half of those with eligible
plans have actually opened HSAs.5
The individual market for health insurance has not grown during the past three years, and the percent of Americans in high-deductible health plans dropped in 2006, according to the Commonwealth Fund.
In keeping with the vision of expanded individual markets, Republicans also favor permitting cross-state selling of insurance. The reduced regulations would create national health insurance markets in which individuals could purchase insurance plans from anywhere in the nation. Under current regulations, insurance products may be sold within a state only if the product is approved by that state’s insurance commissioner and if it abides by the individual state’s mandates. The Republicans propose replacing 50 different sets of state regulations with a single national standard.
4 America’s Health Insurance Plans Center for Policy and Research: “January 2007 Census Shows 4.5 Million People Covered by HSA/High-Deductible Health Plans,” April 2007.
5 US Government Accountability Office, Consumer-Directed Health Plans, Early Enrollee Experiences with Health Savings Accounts and Eligible Health Plans, report to the Hon. Max Baucus (D-Mont.), August 9, 2006. http://www.gao.gov/new.items/d06798.pdf.
Even employers that believe they have a
responsibility to provide health coverage
access for retirees also feel there are limits
to that responsibility.
Opposing views
You’ve heard all the election rhetoric about how each candidate will reform the healthcare system. While it’s still too early to call the contest, here’s the quick party rundown on what employers
can expect once a new presidential term begins. One thing is certain: There will be plenty of changes that affect employees, employers’ obligations, and company profits.
No surprise that it’s
all about change
for the Democrats. Expect broad, more immediate reform across the board, with new mandates, government programs, and funding mechanisms.
Republicans look
to taxes—credits
and incentives—to
spur increased health
insurance market
competition. And they don’t want mandates for individuals or
employers.
Democrats
Strengthen the employer’s role through mandates
Republicans
Give workers the choice through market options
How big businesses
will be affected
In reality, an employer mandate likely won’t have the crucial implications the word mandate implies, because nearly all large employers already provide health coverage. Initially, businesses could see higher benefits costs overall with more workers to cover, but lower premiums for current workers and retirees could result from fewer uninsured in the US healthcare system.
Taking employers off the hook and creating a more robust
individual market, coupled with tax ncentives, could make
work-sponsored plans less popular. This shift could mean
lower overall benefits costs for businesses, but the trend
could weaken a company’s ability to use health benefits as
a central recruiting and retention tool.
How small
businesses
will
be affected
The mandate to provide coverage for employees could hurt small businesses—whether in the form of higher benefits costs or in
the form of penalties. This change may result in the use of new staffing models to replace expensive workers—including hiring more part-time or temporary help—but increased government spending on wellness and prevention programs could enhance worker productivity.
If workers could procure their own affordable health insurance, smaller employers may be able to stop offering health benefits. This could mean cost savings but could also hurt worker recruitment and retention.
How workers
will be affected
Employees can potentially breathe a sigh of relief, knowing that they will be eligible for coverage through employers or through
new government programs. And if more US families are insured, they may see lower out-of-pocket costs for their share of the burden. In an environment where health insurance benefits are a given, workers may look at other criteria when evaluating job offers.
More-affordable health insurance options in the consumer market, along with tax incentives, may entice employees to choose personal plans instead of their employers’ plans. This measure of freedom may mean that employees will look at other factors when considering their choices of employers or of careers.
How retirees
will be affected
Retired workers without employer benefits would have more
coverage options through new government programs.
A renewed emphasis on health savings accounts and related
tax incentives may mean that retirees can stretch their healthcare
dollars further.
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Bolstering or diminishing the employer’s role in healthcare is just one lever that is being used to address healthcare reform. How the parties see the responsibility of the federal government and the responsibility of individuals is another key issue that also gets at the problem—and directly impacts employers. 
Instead of employer or individual mandates, Republicans generally support changes
to tax policy to stimulate a more robust individual insurance market. Their theory
is that with attractive rates and policies, individual consumers—especially those who are currently uninsured—can secure 
