Employment-Based Health Benefits: Recent Trends and Future Outlook
Fronstin, Paul, Inquiry
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.
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. …