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U.S. Department of Labor Futurework
  Trends and Challenges for Work in the 21st Century
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Portability of Benefits, Job Changes, and the Role of Government Policies

by Robert L. Clark, Professor
College of Management North Carolina State University

Task Force Working Paper #WP12

Prepared for the May 25-26, 1999, conference
"Symposium on Changing Employment Relations and New Institutions of Representation"

September 1, 1999

4. Health Insurance for Active Workers

ompany-provided health insurance is central to U.S. health care system as most nonelderly Americans receive health insurance through their company or through dependent coverage based on the employment of a family member. Several significant changes are occurring in employer-provided health insurance. First, there has been a sharp decline in the proportion of workers participating in company health insurance plans in the 1990s. Second, company-provided health insurance has rapidly moved from fee-for-service plans to managed care plans. Finally, employers are shifting an increasing proportion of the cost of health insurance to workers.

The proportion of full-time workers in firms with more than 100 employees who are participating in a company health plan declined from 92 percent in 1989 to 76 percent in 1997 and a similar although somewhat smaller decline is observed among workers in smaller firms (See Table 3). This decline reflects fewer firms offering health insurance and fewer workers choosing to participate in plans when offered. One of the key factors reducing participation in firms that offer health insurance is the increased cost borne by the employee. Among firms with 100 or more employees, the proportion of employees who were required to make a direct contribution for coverage rose from 52 percent in 1989 to 69 percent in 1997 and the proportion required to make an employee contribution for dependent coverage also increased. The annual contributions to health care plans by employees also has increased (Scofea, 1994; U.S. BLS, 1990, 1998b). Higher employee cost are associated with reduced participation among those workers employed by companies that offered health insurance.

Table 3

Text Version

Participation in Company-Provided Health Insurance Plans

Medium and Large Firms

1989

1991

1993

1995

1997

Percent of Full-Time Employees Participating in Plan

92

83

82

77

76

Employee Contribution Required for:

Worker Coverage

52

59

61

67

69

Dependent Coverage

69

74

76

78

80

Type of Plan:

Fee-for-Service

74

67

50

37

27

HMO

17

17

23

27

33

PPO

10

16

26

34

40

Small Firms

1990

1992

1994

1996

Percent of Full-Time Employees Participating in Plan

69

71

66

64

Employee Contribution Required for:

Worker Coverage

41

47

52

52

Dependent Coverage

67

73

75

75

Type of Plan:

Fee-for-Service

74

68

55

36

HMO

14

14

19

27

PPO

13

18

24

35

Source: Various years of U.S. Bureau of Labor Statistics, Employee Benefits in Medium and Large Private Establishments, Employee Benefits in Small Private Industry Establishments, and Employee Benefits in State and Local Governments.

The 1990s has also seen a dramatic change in the type of health insurance received by most workers. In 1989, 74 percent of full-time employees in firms with 100 or more employees who were covered by health insurance were enrolled in a fee-for-service plan, 17 percent were in HMOs, and 10 percent in PPOs. By 1997, the proportion of health care participants in fee-for-service plans had plummeted to only 27 percent while 33 percent were in HMOs and 40 percent were in PPOs (see Table 3).

Substantial variation in health insurance coverage also exists across social and demographic characteristics. In 1995, 148 million nonelderly Americans had some type of employer-provided health insurance. This represented 64 percent of the population with 33 percent receiving coverage on the basis of their own employment and 31 percent being covered as dependents of a worker with health insurance coverage provided by their employer (EBRI, 1997).

Does coverage by health insurance reduce mobility? Does the lack of health insurance encourage job changes? Workers must consider the total value of working for a company as well as the expected value of alternative employment opportunities. Of course, the value of health insurance is likely to play a role. The effect of health insurance arises because not all firms offer health insurance, there is no national health insurance plan, and purchasing health insurance on the private market can be very expensive. A series of recent research studies have examined the impact of health insurance on job mobility. These studies can be separated into two groups, those that find a large and significant effect that coverage by health insurance on the present job is associated with a lower probability of changing jobs ( Madrian, 1994; Cooper and Monheit, 1993; Buchmueller and Valletta, 1996) and those studies that find no evidence to support claims that health insurance is associated with reduced turnover (Holtz-Eakin, 1994; and Kapur, 1998). Efforts to reconcile these conflicting findings have as yet been unsuccessful (Currie and Madrian, 1998).

5. Retiree Health Insurance

ome firms offer health insurance coverage to both active and retired workers. Employer-provided health insurance is a valuable benefit to workers and can influence job turnover and the timing of retirement. Recent surveys by Foster Higgins & Co. indicated that the average cost per retiree for such coverage in 1996 was $5,210 for retirees under the age of 65 and $1,874 for persons 65 and over who were eligible for Medicare (EBRI, 1997). The value to retirees may exceed these company costs because the cost to the individual of purchasing similar private insurance would be much higher. Some companies terminate coverage for retirees at age 65 when they become eligible for Medicare.

Coverage by a company health insurance plan is a significant benefit for older persons and directly affects their economic well-being in retirement. The generosity of retiree health insurance is not linked to previous earnings as workers typically receive the same coverage regardless of their pre-retirement salary. Thus, for persons covered by these plans, retiree health insurance is relatively more important for low wage workers.

Generally, workers in firms with retiree health insurance are able to retire and retain coverage only if they have met certain age and service conditions. These eligibility conditions are often the same as those for receipt of a pension benefit. Typically, active workers receive the same health insurance coverage regardless of their earnings, years of service with the firm, or their position in the company. Similarly, all retirees usually receive the same coverage. Thus, there is no reduction in benefits for early retirement, fewer years of service, or lower earnings. There are no federal requirements for vesting in retiree health plans.

The promise of future health insurance may reduce the likelihood that workers will quit prior to the age at which they are eligible to retire and continue their health insurance coverage. After the worker becomes eligible to retire and immediately receive retiree health insurance, the probability of retirement increases. Limited evidence also indicates that employers view retiree health insurance as an important component of their retirement policy and these plans are often offered in conjunction with pension plans (Clark, Ghent, and Headen, 1994).

Fewer than half of full-time workers are covered by retiree health insurance programs and a higher percentage of employees in large firms are provided this benefit. Coverage is also higher for persons with higher annual earnings (U.S. Department of Labor, 1994a). Workers with longer tenure and unionized workers were also more likely to have retiree health insurance (EBRI, 1997). Thus, the inclusion of the value of retiree health insurance will tend to increase difference in economic well-being among retirees.

Retiree health insurance coverage has been declining since the mid-1980s. Data from the Employee Benefit Survey of Medium and Large Firms show that the proportion of full-time workers covered by retiree health insurance declined by about ten percentage points during the last half of the 1980s (Clark, Ghent, and Headen, 1994). Coverage data, shown in Table 4, indicate that the proportion of active employees who are participating in employer-provided medical insurance plans in which these plans extend coverage to retirees has remained relatively stable in the 1990s; however, the proportion of workers who are covered by medical insurance plans has declined slightly. Thus, the proportion of workers covered by retiree health insurance has declined. Surveys conducted by Foster Higgins & Co. also indicate that the proportion of large employers that provided retiree health insurance policies declined from 46 percent in 1993 to 41 percent in 1995 (EBRI, 1997).

Table 4

Text Only

Percent of Full-Time Employees in Medium and Large Private Establishments Offered Retiree Health Insurance

Type of Coverage

1989

1991

1993

1995

1997

Percent with medical insurance

92

83

82

77

76

Percent of employees with medical insurance that have retiree health insurance:

Persons less than 65

40

42

44

46

-

Persons 65 and over

35

40

41

41

-

Percent of full-time employees with retiree health insurance*

Persons less than 65

37

35

36

35

-

Persons 65 and over

32

33

34

27

-

*The proportion of employees with retiree health insurance is calculated by multiplying the proportion of employees with medical insurance times the percent of those with medical insurance that have retiree health insurance.

Source: Various years of U.S. Bureau of Labor Statistics, Employee Benefits in Medium and Large Private Establishments, Washington: USGPO.

In addition to the decline in the proportion of the labor force covered by retiree health insurance plans, companies that have retained their plans have shifted a greater proportion of the cost of medical care to retirees. A large proportion of those plan sponsors that previously paid the entire cost of the health insurance now require workers to pay a portion of the cost of this insurance. As with their coverage for active workers, many companies have also changed their retiree health plans from traditional fee-for-service to some type of managed care plan.

The decline in coverage is attributable to rapid increases in the cost of providing health insurance over the past decade, an increase in the ratio of retirees to active workers, reductions in Medicare, clarification of the legal obligation of employers to continue to provide these plans, and changes in the accounting requirements concerning the liabilities associated with these plans. The increase in cost to employers of providing health insurance has resulted in a decline in the provision of this benefit to active workers and retirees. In addition, companies have been changing their health care plans away from traditional fee-for-service plans by requiring workers to enroll in HMOs or PPOs.

When retiree health plans were first introduced, many sponsoring firms had relatively small ratios of retirees to active workers. Thus, the added cost of retiree health insurance was relatively small. With the aging of the population and the maturing of sponsoring firms, the cost of retiree health insurance compared to health insurance for active workers increased. In response, many firms began to rethink their position on retiree health insurance.

Most retiree health plans are closely linked to Medicare by covering medical payments that are not reimbursed by Medicare. Reductions in Medicare coverage during the past decade have meant that company costs have risen. Higher costs coupled with expectations for further reductions in Medicare coverage may have also encouraged firms to reduce or eliminate their own health insurance coverage.

The adoption of FASB Statement No. 106, "Employers’ Accounting for Postretirement Benefits Other Than Pensions" in 1990 dramatically altered the reporting standards for retiree health insurance. Prior to this time, most firms simply reported current expenses for retiree health insurance. FASB 106 required that firms recognize accrued liabilities associated with their retiree health plans on their balance sheets. This ruling resulted in many firms acknowledging large liabilities for these plans and also changed how these plans were viewed by many corporate leaders.

Each of these factors increased the costs associated with offering retiree health plans. In response, many firms eliminated their retiree health plans or modified them to shift costs from the firm to the retiree. The likelihood of future expansion of retiree health insurance is low. Despite the recent reduction in the rate of increase in medical cost, expectations are that the cost to employers of providing health insurance will continue to exceed the rate of inflation. Further reductions in Medicare are more likely to exacerbate the decline in coverage than to stimulate employers to make up the difference in gaps in health care coverage. To the extent that retiree health insurance reduces mobility, the decline in the proportion of the work force with this benefit should enhance mobility in the twenty-first century.

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