Research and policy to strengthen the employer‐sponsored health insurance market

1. INTRODUCTION

In 2020, over 163 million Americans – 50% of the US population – were covered by health insurance provided by an employer, either through their own job or as a dependent. ¹ Close to 60% of firms offer health insurance to at least some of their employees. ² The population covered by employer‐sponsored insurance is bigger than that covered by any other form of health insurance in the United States and heterogenous in terms of age, ranging from children of employees to mid‐career adults to those nearing retirement.

Whether and how this market works impacts the cost and generosity of health insurance and prices paid out‐of‐pocket for health services, as well as labor market outcomes such as wages, ultimately affecting access to care and financial well‐being for over half of the US population. Yet, despite its significance to a wide swath of Americans, there remains surprisingly little evidence on the effects of market structure and policy in employer‐sponsored health insurance markets on individuals. In this commentary, I highlight the importance of an in‐depth, evidence‐based understanding of this market, including identifying key questions health services researchers are well‐suited to address.

2. THE GROWING COSTS OF EMPLOYER‐SPONSORED HEALTH INSURANCE

From 2015 to 2019, average annual health care spending among those with employer‐sponsored insurance rose 22% to an average of just over $6000 per person in 2019. ³ As health care spending grows in this population, workers and their families pay in several ways. First, through the increasing cost of health insurance. Average premiums have risen faster than inflation and earnings over the past 5 years, with the average annual premium for family coverage reaching over $22,000 in 2021. ² Close to 60% of covered workers also had a deductible of $1000 or more in 2021, up from just over 30% 10 years ago. ² Recent evidence shows that over 40% of households do not have enough liquid assets to pay even the mid‐range typical deductible for employer‐sponsored health plans, not considering premiums and other out‐of‐pocket costs. ⁴

American workers may also pay for the rising costs of health care through labor market outcomes, including lower wages, less generous benefits, and potentially reduced employment. ⁵ Finally, workers pay through higher point‐of‐care prices for health care services, including hospital admissions, physician visits, labs and tests, and prescription drugs. Indeed, rising prices accounted for about two‐thirds of the increase in health care spending among this population over the 2015–2019 period. ³ In turn, higher prices for health care services are known to have adverse financial consequences and to impede access to necessary care, with a significant proportion of the US adult insured population reporting that they delayed or skipped getting care due to costs. ⁶

In addition to these individual‐level costs, the overall structure of employer‐sponsored health insurance raises big questions. Tying health insurance to employment can mean that when job loss and health needs occur simultaneously, such as during the COVID‐19 pandemic, people may be doubly vulnerable if they lose health insurance due to unemployment at a time when they especially need it. This link also means that people may choose jobs or be “stuck” in suboptimal jobs due to their need for health insurance.

Health economists and health services researchers have examined a number of dimensions of the employer‐sponsored health insurance market, the relationship between insurance and wages, and many questions regarding access to and costs of care. Nevertheless, there is limited understanding of the dynamics among private employers, insurers, and providers and how these dynamics affect health care prices. In turn, prices impact out‐of‐pocket costs through cost‐sharing for health care services (e.g., coinsurance) and when higher costs to insurers are passed along in the form of higher health insurance premiums. Therefore, efforts to improve affordability for employers, insurers, and individuals require a deeper understanding of high prices and potential ways to address them.

3. HIGH AND RISING PRICES IN THE EMPLOYER‐SPONSORED INSURANCE MARKET

The employer‐sponsored health insurance market is less regulated than public insurance programs such as Medicare and Medicaid, and thus relies largely on competition and negotiation among employers, insurers, and health care providers to achieve fair prices and ensure access to care. A range of evidence suggests that competition, for the most part, does not work to achieve these goals. In most markets, neither insurers nor employers have negotiating leverage to counter highly consolidated hospitals and other health care providers. As a result, health care prices paid by those with employer‐sponsored health insurance, their insurers, and employers are, on average, more than twice what Medicare would pay for the same services in the same hospitals. ⁷ These high and rising prices lead to difficulties accessing health care services for individuals and financial burdens for employers, including state governments who provide health care coverage for public employees.

Indeed, recent evidence shows that the prices that insurers and patients with employer‐sponsored health insurance pay are not only more than twice what Medicare would pay for the same services, but that this payment differential between public and private health insurance is growing over time. ⁷ As of 2018, over half of hospital admissions among those with employer‐sponsored insurance were paid at rates at or above 150% of the Medicare price and almost one‐third of admissions were paid at 200% or more of the Medicare price. ⁸ Further, we have found that the differential between public and private rates varies widely across states and within states, within local areas, and even within health systems. ⁷ , ⁹ We have also shown that prices paid by those with employer‐sponsored insurance vary across health care settings, with the same service costing more than double in hospital outpatient departments than it does in physician offices. ¹⁰ , ¹¹ Other studies have brought new attention to the impacts of private equity, out‐of‐network care, state merger review, and vertical integration on health care prices. ¹² , ¹³ , ¹⁴ , ¹⁵ , ¹⁶ , ¹⁷ , ¹⁸ , ¹⁹ , ²⁰ , ²¹ , ²²

Still, there remain numerous questions to answer regarding private health care prices. For example, understanding the role of changes in treatment in price trends is critical as we work to improve affordability without sacrificing quality of care. Examining the relationship between prices and administrative, supply, and labor costs may help shed light on factors driving prices up. Further work on how different hospitals respond to price changes is also important for optimal targeting of policies, recognizing that different types of hospitals have different costs and financial needs.

Another area where we should improve our understanding is how the employer‐sponsored market intersects with other segments of insurance markets, including the Marketplaces established by the Affordable Care Act and managed care segments of Medicaid and Medicare, since both insurers and individuals often participate in multiple of these markets. Finally, in addition to understanding the role of insurer and provider (e.g., hospital) behavior and strategy in determining prices, we have limited understanding of how employers fit into price negotiations and their role in setting prices. As discussed below, employers have wide‐ranging influence over their employees' health care costs and access, yet their decisions in this space are not well understood and deserve more empirical and theoretical attention.

4. EMPLOYER DECISION MAKING AND HEALTH CARE ACCESS

Employers determine which health plans employees have access to as well as how much they pay for the plan and for the care they receive that is covered by their plan. Firms decide which plans to offer (including the number and benefit design of plans), theoretically matching plan offerings to employee preferences; however, there is little evidence on how well employers meet this goal or how broader market dynamics (e.g., prices) affect how many and what types of plans employers offer to their employees. Employers also determine how employees view and pick plans, which can have downstream effects on health access and spending, given evidence that individuals often choose and stay in plans that end up being costly. ²³ , ²⁴ Firm behavior and strategy in this area is not well understood despite the importance of these decisions for employee plan choice, access, and spending.

Firms also make the decision about whether to self‐insure or fully insure. Close to 65% of covered workers are enrolled in plans that are self‐insured, in which the employer assumes financial responsibility for the costs of enrollees' medical claims. Enrollees in these plans typically have lower contribution rates for family coverage than workers in firms that are fully insured; however, there is limited evidence on whether self versus fully insured plans differ in important features such as benefit design (e.g., networks) or whether workers in self versus fully insured plans pay different prices for health care services.

Since self‐insured employers are at risk for the costs associated with employees' health care use, they may have greater incentive to manage these costs, including through negotiation of lower payment rates. At the same time, the ability of these firms to achieve lower prices is likely limited since they typically rely on third‐party administrators (usually the same insurers that provide full risk‐bearing plans to fully insured companies) to conduct provider contract negotiations. Further, evidence to date suggests that most employers do not have the market power to negotiate effectively with highly consolidated health care providers. ²⁵

Understanding how firms decide to self‐ versus fully insure and which plans they offer, how they set benefit design, how they allocate compensation across wages and benefits, and how they work with third‐party administrators to set prices are all topics that require further attention. In turn, the impacts of these decisions on other dimensions of compensation and benefits, including premiums and wages, and on labor market outcomes such as job selection and job lock, are also worthy topics for consideration.

5. CONCLUSION

The employer‐sponsored insurance system dates back to the 1940s. Faced with rising prices, changing labor market patterns (e.g., increased mobility), new technologies, and inequitable access to care, it is an opportune moment to take a step back to consider the strengths and weaknesses of this system, as well as how policy tools can be leveraged to improve it. Unlike public health insurance programs such as Medicare and Medicaid, the federal government has limited direct influence over the employer‐sponsored insurance market; however, it does set standards for self‐insured employer plans through the Employee Retirement Income Security Act. States typically have oversight over fully insured employer plans and can also affect prices and access in self‐insured plans by regulating providers.

States are undertaking a variety of efforts with the objective of lowering health care prices and spending, including targeted price caps, service‐specific reference pricing, insurer rate review, introducing public option health plans, and setting benchmarks for total state health spending growth. ²⁶ As the scope and substance of these policies are debated, evidence on current prices and variation in prices is necessary to estimate which providers, services, and patients will be affected depending on policy design and structure. This baseline understanding of the landscape of private health care prices will also be critical for evaluating the impact of these policies.

Efforts to understand the implications of current policy and regulation related to this market, as well as the potential for policy change to strengthen the market, demand reliable, high‐quality data on the population with employer‐sponsored health insurance. A growing set of such resources is emerging. These include comprehensive datasets of commercial claims for health care services among people with employer‐sponsored insurance such as that offered by the Health Care Cost Institute, databases of information from electronic health records, state all‐payer claims databases that can be accessed by researchers and policy makers, and new federal price transparency data collected from hospitals and soon, health insurers.

Health services researchers are well positioned to make use of these resources to generate new insights into the employer‐sponsored health insurance market. It is also important for researchers to consider how we can help translate these findings into actionable recommendations for policy makers, payers, and employers to lower patient out‐of‐pocket costs on health care services and health insurance, tackle the root problem of high prices, and inform and improve employer offerings and plan design. Throughout efforts to understand and strengthen this market, there must be a clear focus on how different policies exacerbate or ameliorate the disparities in care and access that are the result of structural racism and other forces. There are multiple opportunities, some of which are highlighted in this article, where researchers could play an important role in generating and applying knowledge to improve, and even reimagine, the biggest health insurance market in the United States.

Sen AP. Research and policy to strengthen the employer‐sponsored health insurance market. Health Serv Res. 2022;57(3):439‐442. doi: 10.1111/1475-6773.13982