Employment-Based Health Benefits: Recent Trends and Future Outlook

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The employment-based health benefits system established its roots many years ago. It was during World War H that many more employers began to offer health benefits. Recently, however, both the percentage of workers with employment-based health benefits and the comprehensiveness of such coverage have been declining. This paper examines recent trends in employment-based health benefits. It also considers the likely future of this important workplace benefit in light of shifts from defined benefit to defined contribution models of employee benefits and with regard to the implementation of health reform.

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The employment-based health benefits system established its roots many years ago. Early examples of employment-based health programs include the mining, lumbering, and railroad industries during the late 1800s (Institute of Medicine 1993). Employers in these industries provided company doctors funded by deductions from workers' wages. Employers had a practical interest in providing health services to injured or ill workers, who often worked in remote geographic regions.

It was during World War II that many more employers began to offer health benefits. Because the National War Labor Board (NWLB) froze wages, employers sought ways to get around the wage controls to attract scarce workers. In 1943, the NWLB ruled that employer contributions to insurance did not count as wages, and thus did not increase taxable income, and were not subject to the wage freeze. As a result, health insurance became an attractive means to recruit and retain workers. Growth in employment-based health benefits accelerated during and after World War II, and by the end of the war, health insurance coverage in the United States had tripled (Weir, Orloff, and Skopol 1988).

Since the end of World War II, employer spending on health benefits as a percentage of total compensation has increased. By September 2011, health insurance reached 8.4% overall as a percentage of total compensation, and it is higher for employers that offer coverage. (1) Recently, the cost of providing health benefits has been rising faster than overall inflation and increases in worker earnings (Figure 1). Despite recent high unemployment, employers continue to offer health benefits on a voluntary basis to be competitive in the labor market. They also offer health benefits in order to provide workers and their families with protection from financial losses that can accompany unexpected serious illness or injury, to promote health, and to increase worker productivity. Employers have a motivation to provide health benefits as a means of protecting their investment in employees. The cost of absenteeism and "presenteeism" (attending work while sick) related to health status reduces human capital productivity and can trigger other expenses, such as sick pay and disability costs. In addition, employers have been able to provide group coverage at much lower cost than many individuals would be required to pay in the individual market, if they could get health insurance at all in the individual market.

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Employers could have changed health benefits much like they did with defined benefit pension plans, but they have not. A major reason for continuing to maintain the benefit is that employers have been concerned about the lack of a viable alternative to employment-based health benefits. This may change if employers view publicly sponsored and private health insurance exchanges as a viable alternative to traditional employment-based health benefits.

This paper examines recent trends in employment-based health benefits. It also considers the likely future of this important workplace benefit in light of shifts from defined benefit to defined contribution models of employee benefits and with regard to the implementation of health reform. The next section examines trends in coverage. Trends in cost-sharing are then examined, followed by plan funding and consumer-directed health plans. The paper ends with a discussion of the role that private health insurance exchanges may play in the future of employment-based health benefits.

Recent Trends in Employment-Based Coverage

There have been numerous references to the death of employment-based health benefits. Here is how the employment-based system of providing health benefits has been described: "vanishing"; (2) "failing"; (3) "[employers] are fleeing the system"; (4) "employer-based health care is ending. It is dying in front of our very eyes"; (5) "employer-based health coverage is melting away like a popsicle on the summer sidewalk." (6) Furthermore, some organizations and policymakers have promoted policies that effectively would end employment-based health benefits as we know them (Fronstin and Salisbury 2007), and it can be argued that the Patient Protection and Affordable Care Act (ACA) will impact the future of employment-based health benefits. (7)

Despite the continued rising cost of providing health benefits to workers relative to workers' earnings and overall inflation, an examination of recent history suggests that, for the most part, the availability of employment-based health benefits among large employers has been stable; there has been some erosion in the availability through smaller employers; there has been erosion in the percentage of workers with coverage; and cost-sharing has been increasing. At the same time, out-of-pocket payments as a share of total health care spending are at an all-time low, and the portion of the premium paid by workers remains unchanged since the early 1990s. In what follows, I document trends in some key measures of the availability of, and enrollment into employment-based coverage, and also describe changes in the types of health plans available at the workplace.

Employer Offer Rates

Between 2001 and 2005, the percentage of employers offering coverage fell from 68% to 60% (Figure 2). However, since 2005, the percentage of employers offering coverage has been steady (other than what might be a statistical anomaly in 2010).

Worker Coverage Rates

Since 2000, the percentage of workers with employment-based health coverage has been falling. In 2010, 68.6% of workers had employment-based health benefits, down from 75.9% in 2000 (Figure 3). Despite the fact that the percentage of employers offering health coverage has been relatively steady since 2005, the percentage of workers with coverage has fallen in most years since 2005.

The decline in coverage has occurred among workers getting coverage from their own jobs (own name coverage) and among those getting coverage as dependents. Just over one-half (51.5%) of workers had coverage through their own jobs in 2010, down from 54.2% as recently as 2007. And the percentage of workers with coverage as dependents fell from about 20% in 2000 to 17.1% in 2010.

Structural Changes in the Economy and the Decline in Coverage

If the decline in coverage cannot be attributed to fewer employers offering coverage, then either fewer workers are taking coverage when it is offered or structural changes in the economy are affecting whether workers are eligible for coverage. Past research has found that structural changes to the economy can impact the percentage of workers with coverage. Acs (1995) and Long and Rodgers (1995) found that changes in industry composition accounted for some of the decline in coverage among workers in the 1980s and 1990s. Fronstin and Snider (1996/97) found that besides declines in manufacturing, the increased use of part-time workers and the decline in unionization also contributed to the erosion in coverage. There is no reason not to believe that recent structural changes to the economy have contributed to the continuing decline in coverage as well. Between 2007 and 2010, the percentage of workers employed part time increased from 17% to 20% (Fronstin 2011a), union membership declined slightly from above 12% to below 12%, (8) and manufacturing jobs as a percentage of the workforce has fallen from 17.8% of the work force to 16.4%. (9)

Take-Up Rates Declining

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