Coverage Under Age 65:
Trends, Implications, and Issues
Hospitals, Health Systems, and their Associations
AHA Strategic Planning Committee
Approved for Distribution to and Discussion with the Membership
AHA Board of Trustees
November 16, 2000
America's hospitals are committed to caring for the sick and injured and improving the health of their communities. Hospital trustees, executives, and staff understand that people with health insurance 1, from private or public sources, have greater access to health services, use services at an earlier time in their illness, and receive more comprehensive services, especially for chronic conditions. Because health insurance improves access to care and contributes to improvements in care, the American Hospital Association (AHA) and its members support the goal of "Coverage for All" and continue to pursue initiatives to expand coverage.
Medicare provides almost universal acute care coverage for the population over age 65. Our society has been less successful in providing coverage for all persons under 65. As a new century begins, major changes in coverage for the under-65 population are now threatening the ability of hospitals to care for their communities: some employers are considering reducing their support of group health insurance, cost shifting is increasingly unacceptable to private health plans and the employers who pay their premiums, and the number of uninsured has increased in a time of strong economic growth.
This report by the AHA's Strategic Planning Committee takes a serious look at the growing problem of coverage for those under 65. It reviews the present trends in insurance coverage and highlights how changes in employer practices and the continuing problems of the individual insurance market could dramatically impact coverage.
After a look at present coverage trends and potential developments, the Strategic Planning Committee has identified the implications of coverage changes that hospitals, health systems, and their associations should begin addressing. If our nation is to attain the AHA Vision of "a society of healthy communities, where all individuals reach their highest potential for health," hospitals must understand developing trends and work actively to protect existing coverage and expand coverage to the uninsured.
Coverage Under Age 65
Illness and disease are not evenly distributed. Some fortunate people are well virtually all of their lives, use very few medical services, and die after a short illness. Their medical care costs are modest and could be self funded across a period of time. But many others are either chronically ill across a wide span of their life or have serious illnesses requiring intense interventions.
Because of the variation in the incidence of illness and use of services, researchers find that approximately ten percent of the population uses about seventy percent of the services. This ten percent of the population can not generally fund their own medical care costs.
Historically, our society has used three mechanisms to subsidize the high-cost ten percent in the under-65 population:
- Employment-based, group health insurance has been a cornerstone of the U.S. health care system for sixty years. It has allowed the small percentage of the workers or dependents with major health care needs to be supported by the larger population with only limited needs.
- Cost shifting through which insured patients, primarily those with employment-based group health insurance, are charged more than their costs to create the resources necessary to subsidize both the uninsured and some government programs which pay less than cost, and
- Government programs for the lowest income citizens, especially children and women who head single parent families.
A shifting combination of these three sources has enabled the health care system to care for large numbers of the sickest ten percent of the population.
In examining future coverage trends, it is useful to examine four distinct coverage groups under 65: people who have
- employment-based coverage
- individual coverage
- governmental coverage, and
- no coverage
Each of these groups faces distinct trends, which individually and collectively, may undermine the ability of hospitals to care for the under-65 population in the future.
The largest group of persons under 65, 155 million or 65 percent, have work-based coverage. From the perspective of pooling risks, employment-based coverage has been successful because the people it brought together included many of the lower-cost persons and a few of the higher-cost persons. Employment-based coverage also has lower administrative costs, less adverse selection (which allows a lower average premium), and benefits that are not taxed as income. Admittedly, employment-based pooling has worked better for larger employers than for small employers because a small number of high-cost individuals may have a major impact on premiums.
Employment-based coverage hinges, however, on the willingness of employers to offer coverage as a benefit. In general, the likelihood of health benefits varies directly with firm size: large employers typically offer coverage; smaller employers often do not. This pattern of employer coverage has been used by some to allege that small employers are a major cause of lower coverage rates. Small employers do have lower coverage rates, but recent data show that health insurance has increased as a benefit among small employers from 1995-1999.
Beyond firm size, employment-based coverage is not uniform. Some industries are more likely to offer coverage than others. Finance, government, hospitals, insurance, manufacturing, mining, real estate, and transportation have traditionally offered coverage while agriculture, construction, fast food, personal service, and retail trade industries have not.
Recent research by HRET and Rand has led to new ways to categorize firms that do not offer coverage. Workers least likely to be covered are those who work:
- in firms with a low average wage (i.e., below $10.00 per hour)
- as temporaries, or
- on a contract basis.
The number of persons with employment-based coverage has also been affected by the growing number of people who turn down employer coverage for themselves and, more often, for their dependents. Certainly some who decline employer insurance have coverage through an alternative source, such as a working spouse or military retirement. But many who decline coverage simply remain uninsured.
A number of large employers that have offered health care coverage are questioning whether to continue their traditional practice. They are considering moving to a "defined contribution" model. The incentive to move to defined contributions reflects a number of factors, not necessarily in the following order:
- Positive employer experience with defined contribution retirement plans.
- Concern over future increases in health care costs resulting from the backlash against managed care, projected increases in technology and service use, and more state and federal mandates. For example, new HRET research shows the average monthly premium for employer-provided coverage increased 8.3 percent in 2000, almost double last year's 4.8 percent. Some employers are experiencing substantially greater increases than this average.
- Employee criticism of employers actively managing health care costs for employees by restricting and changing insurance arrangements.
Three alternatives are being discussed, all under the common heading of moving to a defined contribution:
- Fixed payment to selected options. In this alternative, the employer continues to evaluate insurance options, negotiate for premiums, and administer employee (and dependent) enrollment. The employee picks from at least two options, but the employer makes the same premium contribution regardless of which the employee selects. Recent estimates are that about 25 percent of employers presently offering a choice of coverage plan make a fixed contribution regardless of the plan selected.
- Fixed payment with no selection. In this potential option, the employer no longer selects insurance options or negotiates premiums. Rather, employers provide employees, or their selected insurer or broker, with a fixed premium contribution. It is the employee's responsibility to identify, select, and contract for insurance coverage.
- Cash compensation without health benefits. In this scenario, employers eliminate their role in health benefits completely. Those advocating this approach have generally accepted the economists' argument that benefits are simply a part of compensation and conclude that pure cash compensation is easier to administer than pay plus benefits.
Employers presently offering "defined benefit" coverage or the "fixed payment to selected options" for a defined contribution recognize that moving to the latter two forms of defined contribution-fixed payment with no selection or cash compensation without health benefits-would be difficult in today's tight labor markets. However, they are considering the options because a significant recession or an increase in employer liability could make the latter options more feasible.
In summary, employment-based coverage has been the predominate form of coverage for the under sixty-five population. There are, however, defined contribution options being discussed which could dramatically alter historical coverage patterns and undermine the financial stability of hospitals.
First, movement to either fixed payments with no selection or cash compensation without health benefits could lead employees to select less comprehensive coverage with a lower premium (or more out-of-pocket costs). In either case, hospital bad debts are likely to increase.
Second, if employees decline employer coverage because of its cost and do not replace it with individual coverage, the number of uninsured could increase dramatically. For example, if employment-based coverage declines by 10 percent, the number of uninsured would increase by 35 percent if individuals did not acquire individual policies.
15.5 million people, or 6.5 percent of the under-65 population, have individually purchased coverage. The distribution of this population by age is:
|Under 18||5.3 million|
The number of people who think of themselves as having individual coverage may be larger than these numbers indicate. For example, most survey data report COBRA continuation coverage as employer-based coverage. However, some individuals may view COBRA as individual coverage because they are paying the full premium. This would parallel the experience in defined contribution pension plans where some individuals see the plan as their employer's plan, some see it as the investment firm's (e.g., Fidelity's) plan, and others see it as their own plan.
The individual insurance market has a number of dysfunctional attributes, which undermine the concept of insurance pooling. Individuals often seek to purchase insurance only when they have a high likelihood of using it. Insurers want to sell insurance only when individuals are unlikely to use it. As a result, insurers have instituted waiting periods, exclusions, underwriting evaluations, and premium surcharges to limit their risk of adverse selection. Each of these insurer responses increases the price (or decreases the value) of the insurance and tends to reinforce the purchaser's view that the insurance is worthwhile only if you know you are going to use it.
In the past decade, many states have responded to this spiral of dysfunctional behaviors by enacting insurance reforms for the individual coverage market, addressing guaranteed issue, pre-existing conditions and exclusions, and the allowed variation in premiums. In some cases, the adverse impact of the regulation has been a withdrawal of insurers from the individual market.
Despite the difficulties of building a viable business model for individual insurance coverage (at least without a mandate requiring a large number of purchasers), there is a renewed interest in expanding individual coverage.
- Some advocates favor individual coverage because a personally-owned policy reduces job lock, is portable, and has only one pre-existing condition waiting period.
- Some advocates, such as those promoting Medical Savings Accounts, believe individually-owned policies will reduce the demand for health care services and result in increased cost containment.
- Some advocates want to expand individual coverage to address the problems of persons who work in small firms, who are self-employed, or who work part-time. By using tax credits or tax deductions, they seek to give the individual the same tax benefits enjoyed by the population with employer-based coverage.
- Finally, some advocates are concerned that the employment-based system will not survive two forces: (1) increasing global competition and/or (2) the increasing tendency of state and federal governments to increase the cost and regulatory burden of offering health care coverage. These advocates want to develop an individual coverage system as a parallel to and backup for the employment-based system.
The U.S. health system has 60 years of experience with persons covered by employment-based, group health insurance. The impacts of moving to a substantially larger number of individually- insured individuals are unknown.
A third population under age 65 obtains coverage through local, state or federal government programs. The largest programs are Medicaid, SCHIP, CHAMPUS, CHAMPVA, and Medicare disabled/ESRD; however, there are numerous other programs, including local welfare programs.
Presently, 34 million persons, 14.3 percent of the under 65 population are covered by government programs. It should be noted that this does NOT include government employees or active duty military personnel and their dependents who are generally considered to have employment-based coverage.
From a coverage perspective, the most significant issue in government coverage is the many eligible persons not enrolled for Medicaid and SCHIP. In a traditional fee-for-service arrangement, eligible individuals who are not enrolled may delay care unnecessarily, use care inappropriately because they lack a regular source of care, and pose major administrative challenges when finally seeking care. Each of these consequences makes the program less effective.
When a government program adopts a managed care model, the delay in enrollment is a major threat to the health plan. If an individual enrolls only upon receiving service, the health plan may receive only one month's premium as payment for a large medical bill. This is not a sustainable business model if it persists in large numbers. Some government programs reduce this risk to health plan solvency by requiring individuals who are enrolled when seeking care to be in a fee-for-service programs for the first six months of coverage. This provides an opportunity to address existing health problems before enrollment in a capitated plan.
A second coverage problem is the variation in Medicaid, SCHIP, and some other programs across the states. Where the program is a joint federal-state effort, federal requirements usually specify a minimum level of eligibility and number of covered services for the state to receive "matching" federal funds. States are generally able to adopt more generous programs up to a ceiling on eligibility and covered services. As a result, coverage in many of the government programs varies widely across the states. Some states include large number of eligible persons and a broad package of services. Others offer a limited number of services to a smaller population.
While estimates vary, it is generally believed that about 44 million persons under age 65 lack health insurance coverage. This is a population larger than the total Medicare population or greater than the combined population of California, Oregon, Washington State, Alaska, and Hawaii.
Traditionally, the uninsured have been described by their personal characteristics. They are most likely to be self-employed, part-time, unemployed, legal or illegal immigrants, low wage workers, and minorities. Workers in the fields of agriculture, construction, retail trade, personal services, and business services are also likely to be uninsured. There is also a geographic disparity in coverage with individuals in the Southeast, South Central, and Southwest least likely to be insured. Finally, the smaller the firm, the less likely employees will be covered.
Many of the characteristics of the uninsured are related to each other. For example, immigrants are more likely to be minorities, live in the Sunbelt, have low wage jobs, and work in small firms. While this convergence of characteristics makes it easier to estimate the likelihood that an individual will lack coverage, it increases the difficulty in understanding which of the person's characteristics most contributes to the lack of coverage. It also makes it more difficult to know which characteristic to use to address the problem.
The characteristics of the uninsured have been quite consistent over time. Nevertheless, there is change in who is uninsured. In the last few years, the numbers of uninsured have grown in part because of decisions by employees not to cover their dependents, particularly children. One estimate is that 800,000 children lost coverage in a recent year. The numbers of uninsured have also increased as individuals have moved from welfare to work.
Restructuring of the labor market has changed the composition of the uninsured as well. Increasingly, people work in parts of the economy with low coverage rates. These include the service sector, non-union jobs, part-time employment, or contract work. Restructuring has also affected public-sponsored coverage. For example, the percentage of the total under 65 population without coverage has grown by one percent as a direct result of downsizing civilian government and military employment.
In the past two years, several studies have been published which separate the uninsured into those who are not offered coverage and those who fail to accept coverage. Given these recent findings, the uninsured may be best thought of as six subgroups:
- Coverage Not Available
- Employers in firms with a low average wage
- Temporary, part-time, contingent employees
- Persons not working
- Available but not enrolled
- Turned down employer coverage
- Medicaid eligible
- SCHIP eligible
Because of the failure of comprehensive health reform and the differences between these subgroups, the policy community increasingly views distinct, incremental solutions as the most feasible way to reduce the number of uninsured.
One encouraging development is new Census Bureau data released in September 2000 showing a decline in the number of uninsured for the first time in a decade. The decline is primarily due to employers offering coverage for workers and their dependents. Whether this represents the beginning of a new trend or the consequence of a tight labor market that will disappear in the next recession is unknown.
The lack of health insurance does not mean people do not receive health services, including hospital services. Research does show the uninsured have less access to care, use fewer services, fill fewer prescriptions, receive only acute care for chronic illness, and often use the hospital's emergency service as their doorway to diagnosis and treatment. For the hospital, uninsured patients result in fragmented services and unpaid hospital bills.
Traditionally, hospitals charged paying patients, especially privately insured patients, more than their costs in order to subsidize the costs of the uninsured. The practice is known as "cost shifting." However, in the past decade, the move to fixed prices for hospital care, on a per diem or per case basis, has reduced the use of cost shifting as a subsidy mechanism. Thus, growing numbers of uninsured threaten the ability of hospitals to care for patients without regard for their ability to pay.
As noted above, even small changes in employer support for health insurance could increase the number of uninsured dramatically.
The Economy's Impact on Coverage
The economy's growth rate and strength have traditionally had a strong impact on employer-sponsored health insurance, government-sponsored coverage, and the number of uninsured.
A strong economy helps maintain employer-sponsored coverage. Many employers have offered health insurance to improve their recruitment and retention of personnel. In a strong economy with a tight labor market, employers already offering coverage have continued it and other employers have begun to offer it. But employers are re-examining their traditional practices.
Some employers who considered moving to either a fixed payment with no plan selection or cash compensation without health benefits have not adopted these changes because they want to maintain employee support and loyalty. This is especially true in today's tight labor market. How long tight labor markets will last is uncertain, but all indications are that if unemployment increases, more employers will move from defined benefit health care to defined contribution health benefits.
Employers in some fields do not have to provide health care coverage to attract and retain their workforce despite the high employment rates of the past several years. To increase employer-sponsored coverage in these firms, the employers must perceive advantages beyond recruitment and retention. One alternative advantage would be an increase in employee productivity as a result of employee and family wellness, reduced sick time, and more rapid return to work. Unfortunately, there is only very limited research demonstrating the productivity benefits to employers of sponsoring health care coverage for their employees and/or employee dependents.
A strong economy helps stabilize employer coverage. A weak economy reduces employer coverage and increases both the role of government programs and the number of uninsured. If the economy remains strong, John Shields at The Lewin Group estimates 54 million will be uninsured by 2007. If the economy slows, the projected number of uninsured grows rapidly. Custer and Ketsch, at Georgia State University, estimate that 60 million will be uninsured by 2008 if the economy slows. Stephen Schroeder, president of The Robert Wood Johnson Foundation, estimates that 67 million will be uninsured by 2010 if the economy experiences a recession between now and then. The projections for the number of uninsured, in both good and poor economic times, will severely challenge the ability of hospitals to provide care without regard to the patient's ability to pay.
Implications for Hospitals and Health Systems
The AHA's Strategic Planning Committee believes there are at least seven major implications for hospitals and health systems of potential changes in the coverage of the population under age 65:
- The sixty-year foundation of employment-based coverage may change rapidly in the next decade. All other conditions being equal, a strong and tight labor market will reinforce present patterns of employer-sponsored coverage. A weak economy and substantial unemployment would cause some employers to eliminate coverage, move to a fixed contribution with no selection, or shift to cash-only compensation.
- If employers reduce their role in selecting and financing health insurance, health services will have to compete with employee preferences for consumer goods. Hospitals and health systems will care for more people who are uninsured, delay seeking care, and use the system in episodic ways.
- A multi-tiered health system is incompatible with the present regulatory and accreditation system for health care, which requires a single standard and quality of care for all. However, if employees bear more of the costs of health insurance, a multi-tiered coverage system is likely to increase as individuals attempt to reduce the cost of their coverage. Some plans will offer fewer, less comprehensive benefits. Other plans will promise the same benefit package but reduce payment rates to providers. Finally, some plans will provide comprehensive, first dollar coverage to those who can afford it.
- While individual coverage is seen by some as a replacement for employer-sponsored coverage, this is unlikely. Individual coverage has major weaknesses in its business model despite numerous state initiatives to regulate the marketplace. Greater reliance on individual coverage is likely to increase the number of uninsured persons.
- The increase in immigrants from low-income and developing countries has increased the population without a tradition of private insurance coverage. Hospitals are increasingly bearing the costs of caring for this uninsured population because the nation allows increased immigration without developing any mechanism for providing even basic health care coverage as they enter the country.
- A major recession is likely to increase substantially the number of uninsured as individual lose jobs and employers have less incentive to offer coverage.
- A major economic recession will lead to fewer persons having employer-sponsored and/or individual coverage, will increase enrollment in and the demand for cost containment in public programs facing budget deficits, and will facilitate employer interest in arranging defined contribution to health benefits.
Each of these developments weakens the hospital's ability to serve its community. The threat is greater if any of these changes move rapidly or if the strength of the economy declines substantially. On the other hand, government funding could be available now to reduce the number of uninsured. For example, federal government and state governments have record budget surpluses, now and for the projected future. Also, states are beginning to receive funds from the tobacco settlements which could be used to provide coverage for the uninsured.
In light of the potential changes in coverage and the implications for hospitals and health systems, the AHA Strategic Planning Committee recommends members and their association consider and actively discuss the following issues:
Issues for Consideration by Hospitals and Health Systems
- It will be very difficult for hospitals and health systems to persuade other employers to offer health care coverage more generous than that offered within the health system. Hospitals and health systems should review their health insurance benefit programs to assess the standard they imply for the employer community.
- Hospitals and health systems should encourage other employers to continue their role in arranging for and offering health insurance as an employer benefit.
- Hospitals and health systems should work with small employers in their communities who do not provide health insurance benefits to create mechanisms through Chambers of Commerce or other organizations to offer group health insurance coverage.
- Hospitals should encourage employers to broaden the choices available to employees in order to allow employees to maintain the same plans, physicians, and providers across a long span of time. Continuity of coverage is likely to increase enrollment and contribute to appropriate use of the health system.
To help assure that uncompensated care does not create a "falling domino" effect in the health system, hospitals and health systems with limited demand for uncompensated care should support special payments, whether through appropriations or health care payments, for hospitals with a large burden of uncompensated care. Special payments should be explicit and focused on hospitals with the largest uncompensated care net costs and include annual reports showing how the funds were used.
Issues for Consideration by the American Hospital Association
- The AHA should continue actively advocating its three-part incremental approach to increasing coverage for the uninsured: (1) expanding the eligibility of children for Medicaid and SCHIP; (2) extending Medicaid and SCHIP to the parents of eligible children; and (3) enacting refundable tax credits for persons not eligible for coverage from an employer, Medicaid, SCHIP, or Medicare. (See attachment A for a summary of AHA-recommended incremental steps for improving coverage.)
- The AHA should continue to advocate for employer-based, group health insurance for the population under age 65.
- The Health Research and Educational Trust should undertake and/or encourage empirical research that (1) documents the economic benefits to employers of providing coverage to workers and their dependents, (2) evaluates the efficiency of alternative coverage models, and (3) determines why persons offered coverage turn it down.
- With the employment-based market for coverage having reached a likely plateau, the AHA (and state associations) should cautiously support the development of a complementary individual insurance market by supporting tax benefits for individual coverage equivalent to the tax treatment provided employer-sponsored benefits.
- If the number of persons with coverage in the individual health insurance market increases, the AHA should work with state associations to monitor the availability and stability of coverage in the individual market.
- With hospitals obligated under EMTALA to provide screening and stabilization care regardless of the patient's ability to pay, the AHA should consider advocating for a requirement that all coverage plans pay for the EMTALA-required services. The AHA should also consider advocating that governmental programs be established to underwrite EMTALA-required services for the uninsured.
- The AHA should work with state associations to increase the enrollment of eligible children in the joint federal-state SCHIP program.
- The AHA should work with state associations to identify ways to insulate Medicaid and SCHIP from the consequences of an adverse business cycle.
- For government programs which fail to enroll all eligible persons, the AHA (and state associations) should advocate that any authorized funding not spent because of low enrollment be retained in a special state trust fund and used to pay for services provided to the eligible, but uninsured, population.
The American Hospital Association (AHA) supports incremental policy measures designed to expand health care coverage across three specific population groups: 1) children, 2) working families and individuals, and 3) the "near elderly" and early retirees. The AHA believes that incremental steps are likely to be more politically viable and ultimately, will allow greater future receptivity to more comprehensive health reform.
Children: For children, AHA's goal is to achieve universal coverage by first expanding existing public programs. Under this proposal, states will be required to provide 12 months of continuous enrollment for children up to the age of 18, enrolled in either Medicaid or SCHIP, regardless of any changes in their family's income during that period. States could also expand Medicaid and SCHIP coverage to legal immigrant children. To bolster the states' confidence in SCHIP and encourage states' willingness to expand their SCHIP programs, the AHA proposal calls for permanent federal appropriations for the SCHIP program beyond 2007.
Working Families and Individuals: To increase coverage for working families/individuals, the proposal allows states to expand SCHIP to include families of SCHIP-eligible children. AHA also proposes to extend SCHIP and Medicaid coverage to low-income pregnant women, including legal immigrants. Additionally, states could expand Medicaid coverage to single, childless adults with incomes up to 150 percent of the federal poverty level (FPL). Families making the transition from welfare-to-work could also retain their Medicaid coverage for 24 months after leaving welfare. States also would be encouraged to automatically extend Medicaid coverage to Temporary Assistance to Needy Family (TANF) recipients with an enhanced federal match.
Other proposed changes that would benefit working families/individuals involve modifications to the federal tax code. Low-income individuals and families with incomes up to 300 percent of the federal poverty level would be eligible for a fixed-dollar refundable tax credit for the purchase of health insurance. To encourage small businesses (up to 25 employees) to provide health benefits, the AHA supports a tax credit for small employers for the purchase of health insurance. Self-employed taxpayers may deduct payments for health insurance from their adjusted gross income at 100 percent. The proposal requires employers who offer health insurance coverage to allow part-time employees to buy into the employer health insurance. Additional mechanisms to increase affordability include establishing purchasing cooperatives, expanding high-risk pools, and providing federal grants to states to develop affordable insurance products for low-income single individuals.
Near Elderly and Early Retirees: To improve access for near elderly and early retirees, AHA proposes the following: refundable tax credits for health insurance (ages of 55 and 65) and extension of COBRA coverage until they purchase other insurance, they are covered by a spouse's health insurance plan, or they become eligible for Medicare.
Financing options include: 1) funding initiatives out of the projected federal surplus; 2) establishing a modest cap on the employer health insurance tax exclusion; and 3) encouraging states to invest tobacco settlement proceeds in health coverage and access initiatives.
|1||The Committee recognizes that health care coverage includes both purchased insurance policies and self-insurance programs. For simplicity of presentation, this paper will use the phrase health insurance to include both alternatives|