Abstract
Scenarios for low or high rates of health spending growth have important implications for employers that provide coverage (or are on the margin for doing so) and the employee households that benefit from it. For small employers, whether or not coverage is offered is sensitive to premiums, with smaller effects for larger employers. The literature indicates that substantial portions of premium increases are shifted to employees as smaller wage increases and less comprehensive coverage. Innovation in benefit designs, network designs and policies on employer contributions appear to be making it easier for employers to quickly shift unexpectedly high rates of premium increases to employees. High-deductible plans have saved money but sacrificed some of the financial protection for households from expensive illness. The welfare of those getting coverage through employment is strongly affected by spending trends.
For those not insured by Medicare or Medicaid (or getting their health services or insurance through the Department of Defense or the Department of Veterans Affairs), most of their health care is financed through employment-based insurance (ESI) from either private or public employers. How this coverage is affected by spending trends being higher or lower will influence both the employers providing coverage and their employees, who will be influenced both by whether they are offered coverage, what they contribute when they enroll, the nature of the coverage that is offered and how it affects the rest of their compensation. It also affects federal and state revenues, since the exclusion from taxation to employees of employer contributions to coverage and a large part of employee contributions is among the largest tax expenditures. Outside of ESI, spending trends directly affect those who buy individual insurance coverage and those who are uninsured.
A key factor in how the private sector responds to higher or lower trends in spending is the behavioral response by those employers who provide health coverage or are considering doing so. Some time ago, discussion by employers of rising health spending assumed that increased premiums for coverage was simply a burden that was being borne by the employers or their customers in terms of lower profits or higher prices, respectively. They fretted about international competitiveness from higher product prices. This was starkly at odds with economic theory, which predicts fluid tradeoffs between health benefits and other parts of employee compensation, meaning that, at least over time, higher health care spending is borne by employees in the form of less comprehensive insurance, lower wages or a higher share of premiums contributed by employees. Employers would point to difficulties in lowering wages, especially under collective bargaining agreements, and expectations for the comprehensiveness of insurance.
A lot has changed in recent years. A body of economic research has developed about behavior of employers with respect to health insurance provision and compensation. In addition, larger changes in many aspects of employment-sponsored coverage have been witnessed in recent years, especially sharp increases in deductibles, in some cases in conjunction with health savings accounts or health reimbursement accounts. Changes in other aspects of coverage in response to rising spending are also visible, with the potential to become very important in the future. Looser labor markets and greater pressure on employers to maximize profits may be factors leading to the potential of a more elastic response of employment-based coverage today than in the past.
