Why Do Large Employers Want to Control Their Employees’ Health Benefits?
There is no doubt that large employers want to offer health benefits to their employees. It does not seem to bother them that each employee is not free to spend his own money on health insurance that suits his and his family’s needs.
The effect of Obamacare on these benefits has yet to be determined. At one extreme, an analyst at S&P Capital IQ concluded earlier this year that 90 percent of employees working at companies in the S&P 500 stock index would lose their employer-based health benefits by 2020. These are the largest companies in the United States.
Nevertheless, these employers continue to commit themselves resolutely to employer-based benefits. In the next few weeks, I will be a guest at two events where large employers will promote how important health benefits are to them. Tomorrow, the Bipartisan Policy Center will host a conference titled Building Better Health: Innovative Strategies from America’s Business Leaders – A Report from the CEO Council on Health and Innovation. Present will be the CEOs of Coca-Cola (Muhtar Kent), Verizon Communications (Lowell C. McAdam), and Bank of America (Brian T. Moynihan), among others.
In October, the Business Roundtable will host a conference which will promote its recent report, Driving Innovation in the Health Care Market Place. This 108-page report discusses evidence that large employers are successful at managing health costs. Much of the evidence promoted comes from so-called “wellness programs.” For example:
Through an innovative program called “Your Health Matters,” AT&T provides the resources and education to help participants grow from health awareness to health improvement. We strive to reduce the risk of chronic illness by increasing engagement with and adherence to clinical protocols.
Although there are very credible examples of large employers cutting costs by focusing on employees with high health costs (see transparent prices for imaging or surgeries, or disease management for the chronically ill), wellness programs are pretty much a bust. Austin Frakt and Aaron E. Carroll have summarized the research:
Wellness programs are popular among employers. An analysis by the RAND Corporation found that half of all organizations with 50 or more employees have them. The new survey by the Kaiser Family Foundation found that 36 percent of firms with more than 200 workers, and 18 percent of firms over all, use financial incentives tied to health objectives like weight loss and smoking cessation. Even more large firms — 51 percent of those with 200 workers or more — offer incentives for employees to complete health risk assessments, intended to identify health issues.
In fact, asked which programs are most effective at reducing costs, more firms picked wellness programs than any other approach. The Kaiser survey found that 71 percent of all firms think such programs are “very” or “somewhat” effective, compared with only 47 percent for greater employee cost sharing or 33 percent for tighter networks.
What research exists on wellness programs does not support this optimism. This is, in part, because most studies of wellness programs are of poor quality, using weak methods that suggest that wellness programs are associated with lower savings, but don’t prove causation.
However, this doesn’t mean that employers aren’t right, in a way. Wellness programs can achieve cost savings — for employers — by shifting higher costs of care onto workers.
What Frakt and Carroll mean in the last sentence is that wellness programs allow employers to segment their workforce into the healthy and the unhealthy and respond accordingly. It is one way for them to attract healthy workers and reduce their attractiveness to sick ones.
So, wellness programs may be rational within the context of employer-based health care. Nevertheless, the question remains: Why do large employers want to retain control of their employees’ health benefits, instead of supporting a universal, refundable tax credit that a person can use to buy his own health insurance? After all, I’ve never seen a large employer advocate replacing the mortgage-interest tax deduction with employer-based housing. Besides status quo bias, I suspect three things:
First: Large companies believe it is the best bulwark against government-monopoly, single-payer health care. They simply do not see a third option, individually owned health insurance, because it is not widely discussed in the public space.
Second: There is what economists call an “agency problem.” Larger firms have human resource (HR) bureaucracies within them to manage health benefits. These are supplied by a large industry of benefits administrators and insurance brokers, who insist on their value to the C-suite. CEOs come out of sales or finance, not HR. So, they are liable to accept the judgment of HR staff about what is best.
Third: Forcing workers to get health benefits through their employers gives large businesses a competitive advantage over smaller rivals, which do not have the same HR capacity. (If you substitute employer-based housing benefits for health benefits, this becomes immediately obvious.)
Large employers are a major political constituency, and any reform that frees health benefits from employers’ monopoly control will have to gain their acceptance. With the opportunity to repeal and replace Obamacare, winning that acceptance is the next challenge for reformers who want to give healthcare dollars back to the patients who need them.
My employers have been offering wellness programs for the past few years. So far I haven’t bothered to participate. The $200-300 incentive hasn’t been worth the time and effort.
I can’t believe that large companies care whether or not they are the last bulwark against single-payer.
As to why they wouldn’t support universal tax credits in lieu of the existing employer tax exclusion, I can think of a few reasons. Imagine the transition period, when younger employees begin opting out in favor of exchange plans (or cheap individually underwritten plans, if the ACA is ever repealed). Companies would be forced to abandon group coverage. Those that tried to hang on for a few years would be forced to spend increasing amounts before throwing in the towel.
The problem is that none of the tax credit proposals allow for a transition period where individual insurance is comparable to and competitive with employer group insurance. Instead its “throw your hat over the fence”, kill the current order and hope you can make the new system work in a reasonable time frame.
A transition period would allow the new and old system to coexist long enough to compete with one another. People moving from the old to the new system would presumably be doing so by their own choice, rather than someone else’s.
Thank you. That is very thoughtful. We are thinking that over and will have a proposal soon.
I think a lot of employers probably understand implicitly that ,even if they manage to place their employees into individually purchased insurance, the government will then turn increasingly to business taxes to fund the necessary subsidies. Then the companies get to pay for it all anyway, but with no control over what is bought.
Thank you, but why would they care what is bought? It is the employees’ challenge, not the employers’.
WE can work within bOth systems to transition to individual health insurance.
The key is to provide a conversion policy in lieu of COBRA.
It saves the employers money from high COBRA CLAIMS, AND IT P
PROVIDES FORMER EMPLOYEES WITH PERMANENT INSURANCE.
Don Levit
I believe you are on the right track.
Incentives for workers to take care of themselves are a good idea. But any program needs to align the incentives of both worker and employer. Many firms are looking for solutions to the high cost of health care. The best solution is to provide incentives for workers watch what they spend when they go to the doctor — as well as watching for ways to avoid the doctor.
We can all agree that identifying valuable employees that are at-risk for conditions like diabetes can make a difference. However, we can also agree that some employers would just rather get rid of marginal employees who have costly conditions. Whether or not a worker falls into the category of valuable versus expendable likely depends on how hard their skills are to replace. Thus, it’s also in a worker’s self-interest to keep themselves both valuable and healthy. A successful wellness program has to take that into account.
Excellent post, John. this needs broad circulation.
Thank you. Go forth and circulate!
Why Do Large Employers Want to Control Their Employees’ Health Benefits?
A more perplexing question is: why do workers allow employers to control a significant proportion of workers’ compensation? I realize the tax exclusion is the reason often stated by policy wonks. But, the type of benefits workers receive are not the ones they would pay for if buying on their own. The evidence is the individual market, where policies tend to have higher deductibles and higher cost-sharing (and lower premiums). Large firms spend nearly $16,000 for a family policy, which is a large amount of workers’ compensation.
The best explanation I can think of is money illusion. People really think their employers are paying. If you tell people that tax reform that gives them a tax credit directly and removes the exclusion of employer-based benefits from taxable income will result in the employers giving them a significant raise, 9 of 10 will laugh at you. “My employer is greedy, he will never pay me that money.” They do not understand the consequences of a competitive labor market.
I think Yancy Ward’s comment is on point. It’s about control & power. The large companies WANT to be the driver of the medical coverage issue rather than give that up to the gov’t which has to look at the entire population. It’s hard to bargain, negotiate and influence policy when you are not in the middle of the equation. I think small companies would gladly give up the frustration and costs of providing medical coverage. Large companies don’t come out at say it clearly though, because you’d think ending employer-provided medical coverage would be a pro-business proposition. It is = but with an unknown possible pass-on cost that large employer’s would rather not discover after its too late.
Devon:
The MARKET IS RIPE, WOULDN’T YOU SAY, FOR ENTREPRENEURS TO ASSUME MORE OF THE EMPLOYER’S RISK, REDUCE THEIR PREMIUMS, AND RESERVES NEEDED TO PAY CLAIMS – NOT ONLY STOP-LOSS FOR CATASTROPHIC EVENTS, BUT FROM DOLLAR ONE OF A ZERO DEDUCTIBLE?
DON LEVIT
Employers have leverage that employers don’t: the ability to spread risks, buy coverage in bulk and obtain a tax-subsidy that workers cannot get on their own. This sounds good on paper. But, the reality is that over the past 70 years, workers didn’t know what their insurance cost, didn’t realizing they pay the premiums indirectly, and cared little what medical services cost. That all created perverse incentives that drove up the cost of coverage. At this point, I would think employers would be ready to jump off this merry-go-round. But, over the past 70 years employers (especially HR executives) have apparently themselves become fooled into thinking this is a good idea despite evidence to the contrary.
Excellent post! I completely agree that employees are not aware how much of their compensation dollar is controlled by their employer. I would add that some employers have told me that they have to offer insurance to stay competitive in attracting good talent. I argue that offering a higher salary is far more attractive than a benefit package to most employees if the positives are explained to the potential hire.
Beverly:
I thought employers (at least of a certain size) have to provide the costs of health insurance to their employees. I would bet the typical employer/employee is spending $2 for every $1 dollar contributed to retirement plans.
Don Levit
Employers may compete based on salaries, but I expect that many employees view a decent health plan as an absolute requirement.
Yes, because of status quo bias and decades of history. Nothing else.
I’d say it was because of the lack of a credible and time-tested alternative. Health status insurance may be the ultimate answer, but I haven’t seen in actual practice.
I’d like to see what happens when the status insurance company has to negotiate with the health insurers. Does it evolve into a system where the status insurer has a list of preferred health insurance companies?
And then there is the question of getting from here to there…
Bart:
It would be great to see this status insurance in operation.
The more new products, the merrier.
Our Health Matching Insurance will be approved in 2 weeks, according to our conversation with the Texas Dept. of Insurance.
We are working on a conversion option which will provide permanent insurance for former employees.
Don Levit
Managing Partner
National Prosperity Life and health
Don, I agree.
I agree, in the sense that it is very hard to get our hands around something that does not exist yet.
However, I have no doubts that the insurance can arise in the right environment. Reinsurance markets are well developed.
Just a few observations:
For an employee over about age 55, it is not at all a sure thing that individual coverage is cheaper than group coverage. And many times the key employees or even the business owner are over age 55.
and:
It is very very hard to cash out employees, and give them the health care dollars to spend on themselves.
Say that you employ two macninists. One is age 55 with a family — you the employer pay $16,000 for his/her insurance.
The other machinist is age 28 and single. His insurance costs $4000.
Do you add $16,000 to one paycheck and $4000 to another? And expect them to work side by side?
Good luck on that one!
That is a failure of employer-based health care. In a properly functioning individual market (characterized by guaranteed renewable, health status insurance) the worker can use HSA funds to pay premium, and can save in the HSA in early years to pay premium in older years.
Large employers prefer to self-insure because ERISA has made it advantageous for them to do so and in turn, health insurers enjoy certain immunities within private ERISA plans they do not have in other markets. Large employers receive the best healthcare insurance plans at much lower costs than small businesses precisely because of ERISA protections.