Ill-Advised Shift in Health Costs

The U.S. system of workplace-based health insurance is at risk of coming apart. Employers are looking to shift more of their rising medical costs to workers, and despite soft labor markets, many employees are saying no.

The fringe-benefit gurus who advise the largest companies didn’t anticipate fierce worker resistance, just as they failed to foresee the late-1990s backlash against managed care. Instead, they told their clients to take more from workers’ paychecks for medical insurance premiums and require people to pay more out of pocket to doctors and hospitals. Give employees financial responsibility, the consultants predicted, and they and their families would weigh benefits against costs better than HMO bureaucrats did.

Accordingly, well-meaning employers and consultants devised Web-based health-care “decision tools” and demanded that doctors, hospitals and health plans report on their clinical performance. The idea -- or fantasy -- is to motivate health-care consumers by passing them a share of the bill, then to give them the know-how they need to opt for “value.”

It’s a good story line. But it’s faring poorly at the box office. Unions are fighting corporate efforts to shift costs to employees in the form of larger contributions toward premiums and higher out-of-pocket payments to providers. Union members are telling their leaders they’ll settle for lower pay raises to preserve coverage that shields them from the need to weigh costs against the health of loved ones at times of medical crisis.

But unions represent only 10% of private-sector employees. In the nation’s mostly nonunionized workplaces, the employee share of both premiums and payments to caregivers is growing. And employers are finding ways to avoid covering low-wage, less-skilled workers. They’re making new workers wait months to become eligible for coverage, hiring part-timers without offering benefits and farming out jobs to independent contractors.

A recent study led by health economist Sherry Glied, who advised President Clinton and the first President Bush, found that large companies are increasingly using these methods. Between 1987 and 2001, the fraction of large-firm workers without health insurance rose by 57%, more than double that for small-firm employees. This year, according to the Kaiser Family Foundation, large companies are three times as likely as small ones to say it’s “very likely” they’ll raise employee contributions toward premiums for the coverage they still offer.

Meanwhile, prices for coverage outside the workplace are soaring. The upshot is that Americans face growing incentives to “go bare” and to take their chances without employment-based or individual coverage. The rising number of uninsured Americans -- nearly 44 million at last count -- suggests that more people are doing so.

For healthy Americans, this isn’t a senseless gamble. If you’re young and genetically lucky, why lose hundreds, maybe thousands of dollars a year by contributing to a medical risk pool you’re unlikely to tap? The trend toward higher annual deductibles before health insurance kicks in makes this gamble even more attractive, as do higher out-of-pocket co-payments once deductibles are met.

But when healthy people abandon the risk pool, medical insurance markets break down. Those who stay in are sicker, so they push per-person costs (and premiums) higher. Rising premiums, in turn, prompt others to quit the risk pool, fueling a vicious cycle that pushes still more people into the ranks of the uninsured. Hiking co-payments and deductibles only feeds this cycle by making coverage less appealing to all except those most likely to tap it.

To the extent that people are personally responsible for their illnesses, there’s a case for basing premiums on medical risk. Consider, by analogy, fire insurance. People who build or buy homes in fire-prone wild lands should pay more per dollar of coverage than those who don’t, so that their decisions about where to live reflect the higher costs associated with fire risk. Similarly, overweight boomers who eat brie (without drinking red wine) should perhaps pay more for medical insurance than their trim, toned, cross-trained age peers.

For the most part, though, the analogy between medical and fire insurance fails. Connections between conscious decisions and bad outcomes are typically more remote for health than for fire risk. Blind luck, both genetic and environmental, plays a large role in determining the incidence of disease. Behavior and lifestyle matter, but their connection to ill health is usually a long-term affair. Lifestyle changes are both difficult to make and unlikely to yield immediate, large-scale health benefits.

Poverty and race predict myriad medical problems, casting further doubt on the morality of treating clinical need as a matter of individual responsibility. Conservatives and liberals can debate people’s responsibility for their state of health, but there is no proof that higher premiums or out-of-pocket payments deter unhealthful behavior.

To the contrary, higher co-payments and deductibles encourage people to forgo prevention-oriented therapy for high blood pressure, diabetes and other illnesses that, left ill-treated, reduce productivity and shorten lives. For disadvantaged minorities, this effect is especially great, since they tend to earn and inherit less than whites. And there is no proof, so far, that consumers “motivated” by cost-sharing and “empowered” by Web access to performance measures do better than doctors at distinguishing between high-value and low-yield (or even harmful) care.

Reliance on this sort of “motivation” openly ties health-care choice to wealth. Nearly every society provides some basic services to all -- police and fire protection, for example -- regardless of economic standing. By so doing, societies affirm the dignity of all they count as members. Put differently, a social contract assures members a core of services, however their personal fates might otherwise vary.

In every industrialized nation except the U.S., health care of this contract, as a matter of law. Less formally, the U.S. has included health care, albeit in patchwork fashion. Medicare for the elderly and disabled, Medicaid for some poor, employment-based coverage for most and a frayed but functional “safety net” of public hospitals, clinics and charity care for those who fall through the cracks -- all constitute a de facto social contract in the health sphere.

The wide availability of employment-based health coverage reflects both the bargaining power of U.S. workers and the moral force of this social contract. To their credit, employers have continued to offer coverage at roughly the same frequency over the last few years, despite several years of double-digit cost increases. And they have, for the most part, raised employee contributions by little or no more than the level of health-care inflation.

This, though, threatens to change. If companies adopt cost-sharing with a vengeance in the next few years, as many observers predict they will, insurance markets will further unravel. Healthier individuals and groups will abandon the risk pool, pushing premiums (and employer contributions) higher. Should this happen, the number of uninsured Americans would soar, perhaps toward 50 million.

This ugly cycle can be prevented by giving employers strong incentives to offer coverage and to keep payroll deductions for premiums at relatively low levels. Workers who see little or no drop in their take-home pay when they opt for coverage will stay in the risk pool, even if healthy. Similarly, employees and family members who pay minimal out-of-pocket prices for proven, prevention-oriented care will be less inclined to forgo it.

To stabilize insurance markets, public intervention is essential. Tax incentives for companies that resist the cost-shifting temptation can keep risk pools intact. Tax rewards are preferable to regulatory mandates unaccompanied by the resources required to meet them.

Eventually, though, there will come a social reckoning with costs. Over the long haul, soaring public spending for high technologies that yield small benefits is not sustainable. The urgency of covering rising numbers of uninsured Americans will be joined by the need to find socially tolerable ways to set limits, something we have not yet figured out how to do.