Employer Decision Making Regarding Health Insurance. Emergent Issues


  1. The potential for expanded employer liability puts the “social contract” notion of employer-sponsored health insurance at risk. The discussion of self-insurance and the significance of the ERISA preemption triggered an extended and impassioned discussion of the potential impact of pending legislation that could increase employer exposure for liability. The panel uniformly painted a bleak scenario if employer exposure is expanded by virtue of such measures as some form of the “Patient Bill of Rights” proposal. They contended that this could have a rapid and dramatic negative effect on employer support for “tax-preferred benefits.” More specifically, employers fear that class action lawsuits will cascade down on them and fundamentally reduce the value of the tax preference to the point where most employers will conclude the risks exceed the benefits of offering health benefits in their current form. Thus, the “social contract” whereby employers provide health benefits to their workers will become unsustainable and new models and methods will have to be devised. Employers see the potential for serious adversarial relationships between employers and employees that will impede employers from being advocates for their workers. Moreover, companies are not prepared to invest substantially more resources in managing of their health benefits and they simply cannot assume additional accountability in this area. They will either drop benefits or, more likely convert from current defined benefits approaches to some kind of defined contribution strategy. There is precedence for this move in the pension area, triggered in part by FASB 106, but the impact on health benefits may be more complex and adverse for employees.

  2. Future trends are uncertain, but defined contribution strategy is a real possibility. In the absence of a change in liability status for employers, future trends suggest that changes will not be dramatic as long as employers retain reasonable control over costs. Cost participation by workers is likely to grow, including more use of graduated cost sharing based on the cost of services to promote greater employee cost consciousness in such areas as prescription drugs. Participants did not seem nearly as concerned about rising costs as expanded liability. They also noted that the pace of change in benefits is typically relatively slow as industry-level changes take time to spread and for individual firms to adapt to them. Employers clearly would prefer to keep health insurance as a “fringe” benefit/issue and generally not try to shape the health care system. A number of panelists shared the view that policy makers tend to overestimate the relative importance of health care issues to the typical employer.

    If the liability exposure does increase, then this will almost certainly accelerate a shift to defined contribution strategies. There are many uncertainties associated with this scenario since it is unclear what kind of benefit packages employees will have access to; how much involvement employers will wish to or have to maintain to influence the market to make products available; and what the actual market for insurance for workers might be. Some observers, familiar with serious difficulties in the individual or small group insurance markets, see major problems if that is the shape of the market that ensues. The threat of a badly bifurcated market of sick and well consumers presents additional cause for concern. In a defined contribution environment, employees could lose their employer as a cost-control advocate as well as a promoter of quality and measurement data. This might mean diminished purchasing power for the defined contribution that could lead to employees losing access to care. This would lead to growing employee disgruntlement and, in a tight labor market, this would mean employers might have to increase their contributions to sustain benefit levels. Ultimately, then, this will force employers to more fully commit to “total compensation packages” that compels workers to tradeoff health coverage contributions against other benefits and cash compensation.