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OCR for page 34
34
OCR for page 35
z
The Dynamics of Health
Insurance Coverage
This chapter provides an overview of the conditions under which people
acquire, maintain, and lose health insurance coverage in the United States. Under-
standing that health insurance status can change over time and that the risk of
being uninsured changes over the course of a lifetime is critical for identifying and
evaluating the consequences of uninsurance.
In this chapter, the Committee considers the dynamic and unstable nature of
health insurance coverage, which results in large numbers of uninsured Americans.
It opens with a brief discussion of the sources of health insurance coverage and the
role of health benefits as part of an employee's compensation package. Federal and
state policies create the economic and political environments within which oppor-
tunities for coverage are created and accepted or declined. Next the Committee
lays out the mechanisms through which people gain and lose coverage, with
attention to the considerations that frame decision making about offering and
taking up an offer of private or public coverage. Lastly, the chapter considers the
coverage trends over time for both private and public insurance.
NO GUA12ANTEE OF COVE12AGE
In the United States, there is no guarantee for most people
under the age of 65 that they will be eligible for, able to afford the purchase of, or
able to stay enrolled in a health insurance plan.1 American social values contain a
1The Committee distinguishes health insurance from programs and institutions whose missions
include providing health services directly to those who lack other sources of financial coverage for this
35
OCR for page 36
36
CO VERA GE MA TTERS: INSURANCE AND HEALTH CARE
deeply rooted tension with respect to health care. In one respect, health care is
viewed as a market commodity, whose efficiency of production and consumption
depends on the discipline of market forces. Alternatively, health care is understood
to be a social good, something that all members of our society should be able to
obtain when they need it. This tension has contributed to the varied and complex
set of arrangements to finance the delivery of health services that has developed
incrementally in response to specific populations and problems with access to
health care (Stevens, 1989; Stone, 1993~. As a result of this piecemeal approach,
about 40 million Americans find themselves without insurance coverage each
year, and millions more are uninsured at some point when measured over longer
periods of time (Bennefield, 1998a; Mills, 2000~.
Health insurance in the United States is a voluntary matter, yet many people
are involuntarily without coverage. The cost of coverage limits feasible options for
most individuals and families. Employers and government agencies also must make
strategic choices about whether and how much coverage to offer. In addition, the
underwriting and marketing practices of the insurance industry further limit and
at times eliminate- options.
Within the private sector, coverage depends on an employer's decision to
offer a health benefit plan and an employee's decision to enroll or take up this
offer. Employers (and unions) decide whether to sponsor health benefits for some
or all of their work force (on the basis of work status or occupation), how much
to subsidize each worker's insurance premium (if et all), and whether to self-insure
or purchase coverage from a third party. Federal tax policy provides incentives but
no mandate for employers to offer insurance coverage and for employees to
purchase coverage through an employment-based plan. Eighty-four percent of all
employers offered a health insurance plan to at least some of their employees, and
76 percent of all workers (excluding dependents) were offered the option to
participate in an employment-based plan (Fronstin, 2001~. Most employees of-
fered coverage choose to accept (83 percent) and to pay their portion of the
insurance premium, resulting in an overall rate of 63 percent of all workers insured
through their employment-based plan (Fronstin, 2001~.
When workers are not offered the option to purchase employment-based
insurance for themselves and their dependent family members (spouses and minor
children), or if they decline to enroll, they may have no other alternatives for
coverage. Insurance companies may refuse to sell a policy to someone in poor
health, or the premiums may be unaffordable. Thirty-two percent of all members
care, such as public clinics and hospitals, community health centers, and emergency departments.
Similarly, it does not consider the facilities and services of the Indian Health Service, which provide
care to entitled American Indians (members of federally recognized tribes), or those of the Depart-
ment of Veterans Affairs, which serve veterans entitled to care because of military service and disabil-
ity, to constitute health insurance. Access or entitlement to care that is not portable, even in the case
of urgent or emergency care, is not considered "health insurance" as the term is used in this report.
OCR for page 37
THE DYNAMICS OF HEALTH INSURANCE COVERAGE
37
of working families (roughly 40 million people) are not offered health insurance
by the employer of the family's primary wage earner (Custer and Ketsche, 2000b,
using 1996 data from the Medical Expenditure Panel Survey). Among those who
decline a workplace offer of insurance (17 percent), only about a quarter remain
uninsured because most obtain coverage through a spouse's policy. For members
of families who are not offered workplace coverage, the residual uninsured rate is
much higher, at 45 percent (Custer and Ketsche, 2000b).
Public insurance programs fill some but not all ofthe coverage gaps created by
the employment-based approach to health insurance coverage. Participation in
public insurance such as Medicaid and the State Children's Health Insurance
Program (SCHIP) hinges on eligibility, which is means-tested and limited to
specific categories of people for example, children and pregnant women, and
people certified as having a permanent disabling condition. Except for Part A of
the federal Medicare program (hospital insurance), which ensures coverage of
almost all persons 65 years and older, an individual's participation in publicly
sponsored health insurance is optional.
The federally sponsored Medicaid program and SCHIP are structured as
options for states and eligible individuals. States may receive federal matching
funds by establishing a program that fulfills certain national eligibility, benefit, and
reimbursement standards, or they may forgo federal dollars if they choose not to
administer programs that meet these federal standards. All of the states have chosen
to operate both types of programs, and each state determines its own income and
other eligibility criteria within federal statutory limits. One result of the historical
connection between Medicaid and income support programs for low income
families with children has been that coverage rates for childless low income adults
have lagged behind those for children. The enrollment of eligible children in
Medicaid and SCHIP has been hindered by administrative complexities and a lack
of effective communication with parents about their children's potential eligibility
(Perry et al., 2000; Kronebusch, 2001~.
OPPORTUNITIES FOR OBTAINING COVERAGE
Almost seven out of ten Americans under age 65 years (66
percent) are covered by employment-based health insurance, either from their job
or from that of their parent or spouse (Fronstin, 2000d). Individually purchased
policies and public insurance together account for another 21 percent of coverage,
and 17 percent of the general population remains without any coverage through-
out the year (Figure 2.1~.2
Obtaining coverage and staying insured can be a challenging proposition for
2These fractions add to more than 100 percent because some people have coverage from more
than one source during the course of a year, for example, Medicaid for some months and a workplace
policy at another time.
OCR for page 38
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OCR for page 39
THE DYNAMICS OF HEALTH INSURANCE COVERAGE
39
individuals and families. Eligibility, enrollment, and maintenance of enrollment
depend on complex and interdependent considerations related to the labor mar-
ket, the health services market, and population demographic (Figure 2.2~. Espe-
cially for those who do not obtain employment-based coverage, the paths that lead
to enrolling and staying enrolled in a health plan include potential barriers to
coverage.
Employment-Based Insurance Covers Two-Thirds of the
Population Under Age 65
Most Americans under age 65 obtain health insurance through their employ-
ers or as the dependent spouse or child of a wage earner with employment-based
coverage. Employment-based health benefits plans became more common in the
1940s and until the mid-1970s the proportion ofthe population covered by health
insurance rose, at times dramatically (Starr, 1982; Numbers, 1985~. Since the mid-
1970s, however, the growth of per capita health services spending has outstripped
growth in personal income (real wages) and revealed the limits of employment-
based coverage.
The rising cost of health insurance policies has become prohibitive for some
employers and workers, particularly those in small firms, and for employees at
lower wage levels (Kronick and Gilmer, 1999~. In the midst of the recent eco-
nomic boom and low unemployment, the proportion of small- to medium-sized
firms (3-199 employees) offering health insurance actually rose, from 54 to 67
percent (Fronstin, 2001~. These gains, however, are vulnerable not only to the
general state of the economy but also to continued increases in premiums (Fronstin,
2001~.
Virtually all large employers offer health benefits to at least some of their
workforce. Health insurance gives them a way to offer a tax-subsidized benefit
that employees value enough to forgo a higher salary or income. Further, employ-
ers can take advantage of economies of scale and risk pooling to provide this group
health benefit, which employees cannot match on their own. Employers respond
to a variety of considerations when deciding whether to offer health benefits to
their workers and under what terms the offer will be made. The price of coverage
is critical to the employer's decision. The annual total cost for an average health
policy at work is $2,426 for individual and $6,351 for family coverage in 2000.
This represents a cost of doing business that is influenced by federal tax policies,
regional health services markets, and the underwriting practices and vitality of
regional and local insurance markets.
When a firm provides a health insurance benefit, it may choose to withhold it
from some of its employees. Some firms offer the benefit only to employees who
work full-time or have been with the firm for a minimum period. Workers who
are not offered health insurance in the workplace tend to have lower educational
attainment (high-school diploma or less), to hold a low-wage or nonunion job,
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OCR for page 41
THE DYNAMICS OF HEALTH INSURANCE COVERAGE
4
and to be employed in a temporary, part-time, or contract position (Custer and
Ketsche 2000b; Farber and Levy, 2000, Gabel, 1999~.
The employee's share of the insurance premium does not represent the full
cost to the worker of health insurance. According to the economic theory of
compensating differentials, the wage level required to attract workers will be
lower when employers provide subsidized health insurance than it would be if
employers did not offer a subsidy. As a result, economists expect that workers
implicitly "pay" for at least part of their health insurance subsidy by receiving
lower wages than they would otherwise receive (Currie and Madrian, 1999~.
Individual Policies Fill Part of the Coverage Gap
Health insurance purchased by individuals outside the employment-based
group context is, on average, more expensive to obtain, less consistent a product
due to a varied mix of offerings, and unavailable to many people who are, as one
recent study concluded, in "less-than-perfect health" (Pollitz et al., 2001~. About
16 million children and working-age adults were covered by individually issued,
nongroup policies in 1999, or almost 7 percent of the population under age 65
(Fronstin, 2000d). Substantial numbers of enrollees are drawn from the self-
employed and agricultural workers, persons who retire before becoming eligible
for Medicare, part-time and contingent workers, those who lose coverage through
a spouse, and young adults who grow too old to be covered under a parent's
health coverage (Pollitz et al., 2001; GAO, 1996~. While 30 to 40 percent ofthese
enrollees participate for less than a year, to fill coverage gaps created by a change
in economic or other life circumstances, over half of those who purchase indi-
vidual policies do so as a more permanent source of coverage (Chollet and Kirk,
1998~.
Premiums for insurance purchased through a small group or the individual
market are more expensive, on average, than employment-based coverage.3 A
combination of adverse selection (the greater-than-average likelihood that indi-
viduals and families with health problems will purchase coverage rather than be
uninsured), lesser precision in predicting expenditures due to the small size of the
risk pool, and higher administrative costs make the "loading factor" (premiums
tone study, for example, assumes that the premium cost for individually purchased coverage is 20
percent greater than the employee's cost for employment-based coverage (Gabel et al., 1998). The
authors estimate that single coverage purchased on the individual market would cost 32 percent of the
pre-tax annual income of someone whose earnings were less than 100 percent of FPL and family
coverage would cost 41 percent. For persons earning 200 percent of FPL, individually purchased
coverage would cost 16 percent of pre-tax income for single coverage and 20 percent for a family of
four. A more recent study of the individual market found a national average premium for single
coverage to be $333 per month, or about $4,000 annually (Pollitz et al.,2001).
OCR for page 42
42
COVERAGE MATTERS: INSURANCE AND HEALTH CARE
charged minus benefits paid out, divided by premiums) higher for individual
policies than for group insurance (Gabel et al., 1998; Pauly and Percy, 2000~.
Reflecting the relatively high premiums for this source of coverage, more than
half of the population covered under individually purchased insurance live in
families with incomes higher than 300 percent of the federal poverty level (FPL),
or $50,100 for a family of four in 1999 (Chollet and Kirk, 1998) .
Some applicants are priced out of the market for individual coverage. Medical
underwriting practices applied to individual applicants for nongroup coverage
mean that, compared with employment-based coverage, eligibility is more sensi-
tive to an applicant's health status, age, family income, and geographic area of
residence (Chollet and Kirk, 1998~. For example, one recent study of eight
nongroup insurance markets found that the premium price for individual policies
was increased by 38 percent for persons with health problems, compared with a
price quote for a person without health problems (Pollitz et al., 2001~. In addition,
most states allow risk rating for age, which means that individual policies tend to
be steeply price adjusted by age, making individual policies relatively expensive for
older people (Chollet and Kirk, 1998; Blue Cross Blue Shield, 2000~.
Federal and state reforms of the small group and individual markets have
restricted the use of medical underwriting to exclude applicants from eligibility,
although these reforms usually do not restrict the premium prices that may be
charged for such coverage and in some cases have resulted in increased premium
prices (Pollitz et al., 2001~. The Health Insurance Portability and Accountability
Act of 1996 (HIPAA) establishes certain rights to individually purchased coverage
for a limited group of eligible persons who formerly were covered by employ-
ment-based plans (Nichols and Blumberg, 1998~. However, there is no regulation
of the premiums that insurers may charge HIPAA-eligible individuals.
Another HIPAA requirement, that an insurance product be guaranteed to be
available to all, regardless of health status (so-called guaranteed issue), has been
accompanied in some states by premium rating reforms. But even these reforms
only partially address insurers' reluctance to incur adverse risk selection (Hall,
2000; Swartz, 2000~. In a study of seven states where reforms to minimize the
impact of health status on rates included rating bands and modified or pure
community rating, insurers responded by dividing small groups into blocks of
business to re-introduce medical underwriting indirectly, by means of rate adjust-
ments allowed for distinguishing differences in benefits, age, the family size to be
covered, and geographic location (Hall, 2000~.
The individual market may limit benefits for or exclude persons with chronic
health conditions, for example, persons who are HIV positive, have survived a
bout with cancer, or who live with diabetes, heart disease, or asthma (GAO,
1996~. Some 29 states operate or regulate insurance programs that maintain high
risk pools to cover limited numbers of uninsured residents whose poor health
status puts them at higher-than-average risk for incurring large health care costs
and for whom individually purchased coverage would otherwise be inaccessible
(Wolman, 1992; GAO, 1996~. However, there are waiting lists or closed enroll-
OCR for page 43
THE DYNAMICS OF HEALTH INSURANCE COVERAGE
43
meets for many of these pools, and premiums may be as high as 150 to 200 percent
of the price for individually purchased coverage. Nationally, risk pools enroll
approximately 100,000 persons, about half of this number in California and Min-
nesota alone (Pollitz et al., 2001~.
Public Insurance Fills Part of the Coverage Gap
In the 1960s, creation of the basic federal Medicare program for seniors and
the shared federal and state Medicaid programs for specific categories of the poor
brought health insurance coverage to many of those who had been excluded from
the employment-based approach to financing health services delivery (Starr, 1982~.
Individuals who are at least 65 years of age and have worked for at least 10 years
in Medicare-covered employment (or whose spouse has), the permanently and
totally disabled, and those with end-stage renal disease are eligible for Medicare.
Individual eligibility for Medicare depends on age, and for a relatively small
proportion of those covered, on disability or health status. Medicare provides
virtually universal coverage for hospital and outpatient medical services for those
over 65.
Qualifying to participate in Medicaid or SCHIP involves fulfilling require-
ments related to income and assets (making these so-called means-tested programs)
and being a member of a specific group that is eligible for benefits, for example,
pregnant women, minor children, the elderly, and some of the permanently
disabled. Those who meet economic and group criteria must also meet immigra-
tion status and residency requirements. Eligibility standards vary by state, with
general oversight provided by the federal government. Medicaid covers approxi-
mately 41 million people, of whom about half are under the age of 21 and
between 13 million and 14 million are parents and disabled adults under age 65
(Health Care Financing Administration, 2001, 1998 data). Thus, Medicaid covers
approximately 15 percent of the population under age 65 for at least part of each
year. Medicaid also provides supplemental benefits for about 5 million low-in-
come Medicare beneficiaries.
Federal welfare reform legislation passed in 1996 severed the connection
between eligibility for income benefits, such as Aid to Families with Dependent
Children (AFDC) and Supplemental Security Income (SSI), and Medicaid cover-
age. Although this reform was not intended to reduce the number of persons
enrolled in Medicaid, it has had that effect (Broaddus and Ku, 2000; Cunningham
and Park, 2000; Holahan and Kim, 2000; Kronebusch, 2001~. By mid-1997,
almost half of women and 30 percent of children were uninsured a year or more
after leaving welfare (Garrett and Holahan, 2000~. SCHIP, federally authorized in
1997, with implementation beginning in some states the following year, has begun
to reduce the numbers of children who are uninsured. Medicaid enrollments have
also begun to increase, according to administrative data. The latest figures show an
increase in the number of children and adult Medicaid enrollees under age 65 of
OCR for page 44
44
CO VERA GE MA TTERS: INSURANCE AND HEALTH CARE
more than 8 million persons, from 25 million in 1997 to 33 million in 1998
(HCFA, 2001~.
Interaction of Private and Public Insurance
Employment-based coverage and public insurance programs are not explicitly
coordinated, yet they influence one another, particularly in periods of economic
change. Medicaid eligibility expansions since the late 1980s have offset some, but
not all, of the decline in employment-based insurance coverage that occurred
before 1994 (Holahan and Kim, 2000~. Without these Medicaid expansions, it is
estimated that an additional 11 million people would have been uninsured
(Carrasquillo et al., 1999a).
With expansions of Medicaid eligibility and the implementation of SCHIP, a
certain percentage of uninsured persons who were eligible for employment-based
health insurance, and insured persons who had such coverage, may have chosen to
enroll in public insurance instead. In addition, some employers may have been less
likely to offer dependent coverage to their lower-waged workers, knowing that
publicly subsidized insurance was available for children. The extent of this so-
called "crowding out" or substitution of privately purchased coverage by public
insurance has been estimated in a number of studies, none of which is fully
comparable in terms of methods, data sources, or questions asked (Alteras, 2001;
Cutler and Gruber, 1997; Dubay, 1999~. For the Medicaid expansions, early
estimates of crowd-out approaching 50 percent (Cutler and Gruber, 1996 a,b)
have been challenged on methodological grounds. More recent estimates have
been as low as 4 percent, with upper bounds between 17 percent and 23 percent,
depending on how crowd-out is defined and measured (Alteras, 2001; Cutler and
Gruber, 1997; Blumberg et al., 2000; Dubay, 1999; Thorpe and Florence, 1998;
Yazici and Kaestner, 2000~.
Evidence of the substitution or "crowd-out" of private insurance by public
Insurance has informed public policy debates about the importance of balancing
potentially negative outcomes of expanded eligibility for public insurance with
positive outcomes including increased enrollment in insurance, particularly for
children; decreased financial pressure on lower-income family budgets; and an
improved level of covered benefits for working families (Alteras, 2001; Dubay
and Kenney, 2001; Lutzsky and Hill, 2001; Swartz, 1996~. For example, in the
case of SCHIP, there is concern not to single out for unfair treatment those
families who have valued coverage highly enough to purchase coverage for their
children at a high cost, by denying them entry into publicly subsidized insurance
(Swartz, 1996~.
Popular belief that Medicaid expansions resulted in a substantial crowding out
of employment-based coverage has influenced the design and functioning of
SCHIP, reflecting a tension between efforts to diminish substitution while boost-
ing enrollment (Lutzsky and Hill, 2001~. The Balanced Budget Act of 1997,
which created SCHIP, and the federal regulations that guide implementation both
OCR for page 47
47
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OCR for page 48
48
How People Gain Coverage
· Get a job where insurance is offered and
premiums are affordable
Purchase insurance on your own, if you
qualify and can afford the premiums
Marry someone with insurance and if
family out-of-pocket premiums are
affordable
Qualify for Medicaid, SCHIP, or
Medicare
CO VERA GE MA TTERS: INSURANCE AND HEALTH CARE
How People Lose Coverage
Lose a job where insurance was offered,
so employer no longer subsidizes
premiums
· Lose Medicaid or SCHIP eligibility once
you or your children grow up or if your
family's income increases
Lose your spouse due to separation,
divorce, or death
Attain the age of 18 or graduate from
college and lose eligibility under
parents' plan
· Your insurer goes out of business or
cancels its contract with you, or your
employer denies coverage to you
· Be priced out of the market when the
cost of premiums increases
FIGURE 2.4 Examples of ways in which people gain and lose health insurance.
SOURCE: Adapted from Weissman and Epstein, 1994, Table 2-2.
Periods with No Coverage
For some people, lack of insurance is a temporary or one-time interruption of
coverage, while for others, being uninsured is a periodically recurring experience
or a permanent state of affairs. Brief, temporary lapses of health insurance coverage
are less likely than longer uninsured periods to have significant detrimental effects
on access to health care (Ayanian et al., 2000; Kasper et al., 2000~. Yet even short
periods with no insurance carry with them the financial risk of exposure to
extraordinary health expenses. As a result, both the stability of insurance coverage
and the length of uninsured periods have the potential to affect the health and
financial well-being of individuals, families, and communities.
Longitudinal surveys provide the basis for estimating the prevalence and
duration of uninsured spells. During 1994, the latest year for which the Survey of
Income and Program Participation (SIPP) results are available, an estimated 53
million Americans, or 21 percent of the population under age 65, were uninsured
for at least one month (Bennefield, 1998a). The median duration of periods
without insurance is between 5 and 6 months, measured over a 36-month period.
Those who are uninsured for less than six months are at some financial risk for
incurring extraordinarily high medical expenses while uncovered, whereas those
who are uninsured for longer periods face increased chances of problems in
obtaining health care as well as experiencing cumulatively greater financial risks.
The duration and frequency of periods without insurance vary with the
source of coverage and among different populations. One analysis of periods
without coverage found family income, educational attainment and employment
OCR for page 49
THE DYNAMICS OF HEALTH INSURANCE COVERAGE
49
sector as measured just before the loss of health insurance to have the strongest
effect on the length of time uninsured. The authors of this study concluded that
policies to address the problem of uninsurance need to take into account the
precipitating factors in losing and gaining coverage as well as the income, work-
place and personal characteristics often associated with periods of uninsurance of
varying lengths (Swartz et al., 1993a). Policy interventions need to be designed
with an awareness of the populations and problems that they ultimately affect:
either those who experience short periods without coverage or persons who
remain uninsured for longer intervals. Often a single strategy does not address both
kinds of problems (Short and Klerman, 1998~.
People who previously had individual insurance account for more than half of
all uninsured periods, perhaps because the cost of individual insurance is relatively
high and may become unaffordable or because an insurance company refuses to
renew a policy if the holder becomes a bad risk. Those who lose employment-
based coverage account for only one-third of uninsured periods Jensen, 1992~.
This is notable given that more than two-thirds of the public have employment-
based coverage and only 7 percent have individual coverage. Young adults age
18-24, workers with job interruptions, and persons in lower-income families Hess
than 200 percent of FPL) all have roughly a 50 percent chance of going without
health coverage for at least one month during a three year period (Bennefield,
1998a). Children, young adults, persons with some college education, and full-
time workers tend to experience shorter periods uninsured than do adults who
have not attended college or who work part-time, are unemployed, or are not in
the labor force (Bennefield, 1998a).
Low-income uninsured persons tend to stay uninsured for longer than those
with higher incomes. The typical or median time period without coverage for
someone below the FPL is significantly longer than for all other persons more
than 8 months compared with 6 months (McBride, 1997~.
Coverage is particularly episodic for lower income women. Medicaid enroll-
ment periods for single women tend to be short; more than half maintain enroll-
ment for less than one year, not quite one-third last more than two years, and only
15 percent last longer than five years. One study of a sample of unmarried women
between the ages of 19 and 44 found that one-third of all new Medicaid enrollees
had private health insurance just prior to enrolling in Medicaid (Short and Freed-
man, 1998~. Among former welfare recipients who lost Medicaid benefits, one
year after leaving welfare 28-38 percent had private coverage, 36-49 percent were
uninsured, and 22-26 percent had returned to Medicaid (Garrett and Holahan,
2000; Short and Freedman, 1998~.
CON ST12AIN ED COVE12AGE OPTIONS
The substantial cost of health insurance means that employers
and consumers alike face difficult choices about when and how much health
insurance to purchase.
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50
CO VERA GE MA TTERS: INSURANCE AND HEALTH CARE
Difficult Choices for Employers
The cost and availability of group policies to employers reflects the gamut of
insurance company practices, state regulations, and constraints imposed by ERISA
and HIPAA, which prohibit employer discrimination in eligibility for coverage
based on health status. The average cost of a family policy in an employment-
based group was $6,351 per year in 2000 (Kaiser-HRET, 2000~. The price for a
particular insurance policy may be affected by insurance company practices rang-
ing from risk-rating (based either on the group's experience or medical underwrit-
ing) to restrictions on coverage of specific persons, populations, conditions, or
episodes. The price of the insurance premium offered to a firm reflects a number
of considerations, including firm size, whether it is unionized, the employment
sector, and federal tax policies. In addition, an insurance company may decline to
offer or to renew a group policy at all, based on decisions related to underwriting
practices. Group health insurance premiums vary geographically, with the highest
individual and family coverage premiums occurring in the Northeast region, and
the lowest in the West. This regional variation amounts to about 15 percentage
points around the national average premium price (Kaiser-HRET, 2000~.
Employers have used direct and indirect means to constrain their health
insurance costs. Although the share of the health insurance premium paid directly
by the employee varies from none to all, workers on average pay 14 percent ofthe
cost of individual coverage and 27 percent of the cost of family coverage (Kaiser-
HRET, 2000~. From 1979 through 1995, when the cost of health services rose
more quickly than did real income, one common employer response to price
increases was to reduce the size and proportion of their subsidy of their employees'
health insurance premiums, with lower-wage workers experiencing the greatest
decline in subsidy (Medoffet al., 2001~. For example, between 1988 and 1996, the
proportion of the average worker's share for single coverage increased from 10
percent to 22 percent (GAO, 1997a). The proportion paid for family coverage
increased more slowly, from 26 percent to 30 percent (and from 34 to 44 percent
for coverage offered by small to medium-sized firms), although the dollar cost of
the average worker's share for family coverage increased more than for single
coverage, an 111 percent increase compared with a 79 percent increase for single
coverage (Gabel et al., 1997; GAO, 1997a). Since 1996 the trend has been toward
smaller proportional and absolute premium payments by employees for individual
coverage and roughly steady employee contributions for family coverage (Kaiser-
HRET, 2000~. Also, fewer employers are extending coverage to retirees, who, if
they retire before age 65, must find an individual policy to cover them until they
become eligible for Medicare (McArdle et al., 1999; Fronstin, 2001; GAO, 2001b).
Small employers usually face higher group health insurance premium rates
than do large employers. Larger firms can cushion themselves from the financial
impact of insurance company underwriting practices and restrictions by choosing
to self-insure their employee's health benefits, often using a third-party adminis-
trator. Small employers may receive poorer benefits for premiums comparable to
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THE DYNAMICS OF HEALTH INSURANCE COVERAGE
5
those of large firms, because of both a higher risk premium and higher administra-
tive costs per person. Insurers may decline to write policies, or write relatively
expensive ones, for small to midsized firms in particular employment sectors such
as seasonal workers or hazardous occupations (Weissman and Epstein, 1994~.
Because wage rates tend to be lower in smaller firms, the financial strain on both
employers and workers is increased (Gabel, 1999~. As a result, some small employ-
ers simply decline to offer coverage. Among small businesses surveyed, the most
common and highest-ranking reason for not offering insurance benefits was the
expense of coverage (Fronstin and Helman, 2000~.
Difficult Choices for Individuals
Financial concerns constrain a person's decision to enroll in employment-
sponsored coverage or to purchase individual health insurance. The choice the
individual or family makes reflects the value decision makers place on avoiding
risk, their beliefs or expectations about future health care needs and costs, the
anticipated out-of-pocket costs (including any premiums and copayments), and
the ability of the family to pay such costs. The choice reflects, in part, a compari-
son of employee premium costs and health care costs not covered by the policy,
which constitute the individual's or family's out-of-pocket expenditures, with
what they expect to incur in total health care costs, plus some allowance for the
desire to avoid the risk of higher payments absent insurance. It also reflects the
value of health services relative to other goods and services the family needs, such
as food, rent, and utilities. Estimates of consumers' responsiveness to changes in
the price of health insurance based on the choices of workers without employ-
ment-based coverage reveal that such purchase decisions are not very sensitive to
price (Marquis and Long, 1995) .5
The expense of the insurance premiums paid by employees tops the list of
reasons why uninsured workers decline to take employment-based insurance when
it is offered (Cooper and Schone, 1997~. Between 1979 and 1995, the proportion
of workers who paid less than 5 percent of their family income for health care
expenditures (including expenses covered by private health insurance) declined by
half, from about 50 percent to 26 percent, while the proportion of workers who
paid over 10 percent of their family income increased by over half, from 20
percent to 33 percent (Kronick and Gilmer, 1999~. A recent survey found that
uninsured adults cite the expense of insurance as a major or the most important
reason they do not have coverage (Hoffman and Schlobohm, 2000~. Although
almost 16 million Americans under the age of 65 purchase individual health
5The authors of this study estimate a price elasticity of-0.3 to -0.4 and an income elasticity of 0.15
using Current Population Survey and Survey of Income and Program Participation data from 1988
and 1987, respectively, and prices for a standard insurance product in different market areas.
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Representative terms from entire chapter:
insurance coverage
52
CO VERA GE MA TTERS: INSURANCE AND HEALTH CARE
insurance policies directly from insurers or their agents rather than through an
employer, the higher cost of individual nongroup coverage limits its use, and
persons in poor health may be excluded from this market altogether.
Often the offer of health insurance through the workplace entails significant
premium costs that must be paid directly by the employee, particularly for family
coverage (Figure 2.5~. The average employer premium contribution of 86 percent
for individual and 73 percent for family coverage conceals a highly variable set of
arrangements (Kaiser-HRET, 2000~. In firms with low-waged workers (i.e., more
than a third of the work force earns less than $20,000 annually), employers
contribute a smaller proportion of the premium. The lower level of employer
contribution to family premiums in low-waged firms (63 percent compared to 73
percent overall) adds $53 per month on average to the employee's cost, above the
national average of$138 monthly for family coverage (Kaiser-HRET, 2000~. For
a worker earning $20,000 per year, roughly $10 per hour, the employee's cost for
family coverage would be more than 11 percent of before-tax income.
For all families, but particularly those of lower and moderate income and for
persons faced with a health problem, cost considerations often limit choices.
Families with very limited income may have to choose between paying a high
share of family income on health insurance premiums or having to decline enroll-
37.2%
9.7%
Ave rage Worse r's Portion ($1 ,656)
Worl
THE DYNAMICS OF HEALTH INSURANCE COVERAGE
53
ment to be able to pay for rent, food, and other necessities. However, by declining
enrollment, they risk a wide range of adverse impacts on health, family well-being,
and financial stability.
Four out of five people without insurance (82 percent) are members of
families in which at least one person works full- or part-time during the year
(Hoffman and Pohl, 2000~. Only 55 percent of workers whose hourly rate is
below $7 are offered employment-based insurance, through either their own or a
family member's job, compared with 96 percent of workers whose hourly rate is
above $15. The proportion of employees who choose to enroll in their employ-
ment-based plan or a family member's health plan when given the opportunity is
76 percent for the lowest wage workers, compared with 94 percent for the
highest-wage workers (Cooper and Schone, 1997~.
INSURANCE TRENDS
For both children and adults, the number without health insur-
ance and their relative proportion of the total population grew through the reces-
sions of the late 1970s, the mid-1980s, and the early 1990s, as well as during the
periods of economic prosperity in between and since the mid-1990s (Holahan and
Kim, 2000~. The numbers of the uninsured have increased by almost a third since
1987 when an estimated 32 million people under age 65 were uninsured, while
their share of the overall population has grown more slowly, from 15 percent in
1987 to 17.5 percent in 1999 (Fronstin, 2000d).
Since the latter part of the 1970s, the prime economic force behind the rising
numbers of uninsured Americans, and the declining proportion of Americans
covered through employment-based insurance, has been the gap created as the rise
in real income or purchasing power has lagged behind increases in health services
costs and the costs involved in purchasing health insurance (Figure 2.6) (Cooper
and Schone, 1997; Holahan and Kim, 2000~. In constant 1998 dollars, the cost of
employment-based health insurance increased 250 percent between 1977 and
1998 and the employee's share of insurance premiums increased 350 percent
(Gabel, 1999~. During that same period, median household incomes increased in
real terms by 17 percent (U.S. Census Bureau, 2000~. After having stabilized as a
percentage ofthe Gross Domestic Product (GDP) between 1993 and 1999, health
care spending is once again projected to increase over the next ten years in relation
to GDP (Healer et al., 2001~. Health insurance premiums increased faster in 1999
than in the previous five-year period (6.5 percent compared with a 5 percent
average annual growth rate) (Healer et al., 2001~.
Declines in Employment-Based Coverage
Counter to the long-term trend, employment-based health insurance has
been growing since 1994 and contributed to a small reduction in the national
uninsured rate for the first time in 1999. This reduction in the likelihood of being
54
14
12
cat, 1 0
In
8
cl' 6
4
2
o
CO VERA GE MA TTERS: INSURANCE AND HEALTH CARE
He alth I ns urance Pre miums
(Employe r Subs idy and Employe e
Share )
Medical Inflation
Overall Inflation
Workers' Eamings
*,
t
~ 1
-
/ ~
. 1 1 1 1 1 1 1 1 1 1 1 1
,~~~ ,~~9 PRO 99~ 99~ 99'5 99> ~99~ ~99~ kick\ ~99~ ~99 MOO
FIGURE 2.6 Health insurance premiums increased more quickly than earnings, 1988-
1999.
SOURCE: Kaiser-HRET, 2000.
uninsured has occurred within the context of a robust economy over the preced-
ing six years. Over the longer term (since the late 1970s) there has been a decline
in employment-based coverage. Between 1979 and 1997, health insurance cover-
age rates for government workers and their families remained relatively stable at
about 80 percent, while coverage of workers employed in the private sector and
their families declined by 7 percentage points to 64 percent (Farber and Levy,
2000~. Two factors contributed to this decline in private-sector employment-
based coverage. First, eligibility for employment-based insurance decreased for
"peripheral" workers (those in part-time or recently acquired positions). Second,
the take-up rate for "core" workers (those who have held full-time positions for a
longer period) declined (Farber and Levy, 2000~. This gradual but extended
decline in employment-based coverage appears to have ended after reaching a low
of 64 percent in 1993 (Fronstin, 2000d).6
6Because of changes in the Current Population Survey questionnaire and sampling procedures
beginning with the March 1995 survey, most analysts caution against overinterpreting changes during
the 1993-1994 period (Holahan and Kim, 2000).
THE DYNAMICS OF HEALTH INSURANCE COVERAGE
55
Through the early 1990s, declines in employment-based coverage were par-
tially attenuated by modest growth in public insurance and individually purchased
coverage. Increases in the uninsured rate since the mid-1990s have been attributed
to declines in public insurance and individually purchased coverage, despite in-
creases since 1993 in employment-based coverage (Holahan and Kim, 2000~.
Ups and Downs in Public Program Enrollment
Fundamental changes in public policies have affected both the size and the
composition of the uninsured population over the last 15 years. Expansions of
Medicaid eligibility for children and pregnant women beginning in the mid-1980s
boosted eligibility and, to a lesser degree, enrollments in state public insurance
programs. In the mid-1990s, enrollment in public insurance decreased sharply
with the enactment of the Personal Responsibility and Work Opportunities Rec-
onciliation Act of 1996 (PRWORA), which uncoupled Medicaid eligibility from
income support and placed new restrictions on legal immigrants' eligibility, in-
cluding a five-year bar on participation by immigrants arriving after August 1996
(Ku and Blaney, 2000; Rosenbaum, 2000; Guendelman et al., 2001; Holahan et
al., 2001; Ku and Matani, 2001~.7 Many lower-income parents (mostly women)
did not enroll because they either lost eligibility for Medicaid or believed that they
were no longer eligible because of their loss of income benefits (Garrett and
Holahan, 2000; Holahan, 2001~. Although the PRWORA's provisions were
intended to allow families to maintain health coverage after cash benefits ended,
separate enrollment processes for the two programs and confusion have contrib-
uted to reduced Medicaid enrollments.
Since the implementation of SCHIP, there has been some recovery of public
coverage for lower-income children. However, an estimated 94 percent of unin-
sured children in lower-income families are eligible for public insurance but not
fully enrolled: all but 400,000 of the estimated 7.1 million uninsured lower-
income children (Broaddus and Ku, 2000~. SCHIP has experienced slow growth
in its first years, and serious problems remain in reaching enrollment targets. While
3.3 million children had been enrolled by October 2000, maintaining children's
participation in SCHIP beyond the first enrollment period presents additional
challenges (Broaddus and Ku, 2000; Cunningham and Park, 2000~.
Prospects for Employment-Based Coverage
A continuation of the economic slowdown that began in late 2000, or a
further softening of the labor market, could erase the modest gains made in
employment-based coverage since 1994 (GAO, 2001a). A recent study by the
7States have the option to cover legal immigrants arriving before August 1996 and the option to
cover them after the five-year period.
56
COVERAGE MATTERS: INSURANCE AND HEALTH CARE
Center for Risk Management and Insurance Research at Georgia State University
suggests that a strong economy and competitive labor market do affect employ-
ment-based coverage rates. This analysis identified a rising wage level as account-
ing for more than half of the observed increase in employment-based coverage
between 1997 and 1999 (Custer and Ketsche, 2000a). When the authors of this
study projected the current estimate of 42 million uninsured Americans eight years
forward, based on different economic scenarios, they concluded (Custer and
Ketsche, 2000a):
· "Assuming continued economic growth and moderate health care cost
inflation, the number of uninsured Americans will rise to more than 48 million in
2009.
· In the event of a recession, the number who lack coverage will reach 61
million by 2009.
· Rapid economic growth coupled with rapid health care cost inflation,
such as characterized the 1980s, would lead to roughly 55 million uninsured in
2009."
Under a different and more optimistic scenario, even if the most recent rate of
decline in the number of uninsured Americans continues for five more years, an
estimated 34 million people would still be uninsured by 2005 (Fronstin, 2001~.
According to U.S. Labor Department unemployment filings, mass layoffs (50
or more workers) lasting more than 30 days increased by 25 percent, comparing
the first calendar quarter of 2001 with the first quarter of 2000. Manufacturing
industries accounted for an increasing share of all layoffs (U.S. Department of
Labor, 2001~. The manufacturing sector is one that is more likely to offer health
benefits, which workers who are laid off may lose if they cannot afford to pay the
premiums.
SUMMARY
This chapter has described the conditions under which health
insurance coverage is obtained and lost, and the individual, economic and policy
factors that affect opportunities for coverage and that increase or diminish the
likelihood of being uninsured. The following chapter presents a detailed picture of
that cross-section of Americans who are uninsured and the relative burdens of
. . .
un~nsurance among various population groups.
NOTES
