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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

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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.

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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.

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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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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).

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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-

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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

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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

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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

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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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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 OCR for page 34
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

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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).

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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.

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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.

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NOTES