Improving and Strengthening Employer-Sponsored Insurance

Some 58.1% of non-elderly Americans (158 million people) receive health care benefits through their employers as of 2019, making employer-sponsored insurance (ESI) the nation’s largest source of health coverage. ESI is the foundation for the nation’s public-private health system, but rising health care costs continue to put pressure on employers seeking to offer the same level of benefits and to boost wages. Similarly, employees are seeing their health insurance premiums rise in the face of stagnant real wages. Even the largest private employers lack the resources or market power to prompt and sustain the systemwide changes needed to improve the value they receive for their health care spending. They must contend with U.S. health care costs that have been rising for decades, outstripping inflation, wage growth, and overall economic growth and, in turn, squeezing incomes. Despite ESI being the dominant source of coverage, in-depth policy discussion on how to improve the employer system is lacking. With the policy conversation focusing on Medicare, Medicaid, and the individual market, decision-makers are left wanting for ESI-dedicated proposals and analysis. Consequently, both employers and employees need solutions to improve ESI so it can remain in place for the foreseeable future.

Today, employers offer a spectrum of ESI plans: Some are generous, while others do not meet employee needs. Lower-income workers are less likely to get their health coverage through ESI, which raises equity concerns. Lower-income employees who receive health coverage via ESI are also more likely than their higher-income counterparts to skimp on medical care and prescriptions, have problems paying their medical bills, and visit an emergency room.

Nonetheless, ESI is a popular benefit with employees. Employers offer health care benefits to recruit and retain employees, and they see the value of maintaining those benefits, especially in the face of talent shortages and resignations. In June 2022 alone, 4.2 million people quit their jobs as part of the “Great Resignation” and, as of that month, nearly 11 million positions remained unfilled. Employees were two times likelier to switch careers and less likely to recommend their employer if they did not get the health coverage they needed. As a result, employers must balance the need to offer generous benefit packages to attract and retain skilled employees with the high and rising costs of providing health care benefits.

Total health spending has grown from 6.9% of the economy in 1970 to nearly 20% in 2020. In inflation-adjusted terms, per capita health spending rose from $1,875 to $12,531 over that same period. As a result, from 2009 to 2019, the growth in deductibles (162%) and premiums (54%) has far outpaced inflation (26%) and wage growth (20%). Nearly 30% of employees now face deductibles of at least $2,000, which is prompting some employees to postpone or forgo the health care they need.

What is driving health care cost increases? Multiple studies have shown that unit prices, or the prices for individual services and products, are the largest contributor to health care cost growth. Health care prices rose 16% from 2012 to 2016—four times as fast as inflation. Hospital spending represented the lion’s share of U.S. health spending (31% in 2020), and hospital prices are a critical driver of spending growth—rising 42% between 2007 and 2014. Numerous studies have found that hospital consolidation—which enables hospitals with more market power to charge more—to be a key driver of higher prices. Pharmaceutical prices are also a significant contributor to the growth in health care spending. On a per capita basis, Americans spent more than $1,100 on prescription drugs in 2019. In 2018, retail prices for widely used brand name pharmaceuticals increased by 5.8%—more than double the rate of inflation over the same period.

As a result, the Biden administration and Congress must take steps to help constrain health care cost increases and give employers the payment and pricing tools they need to strengthen ESI. With such tools, employers and other stakeholders can create a high value ESI system that improves health outcomes and constrains costs.

Policymakers have made no major changes to the health care system, including ESI, since the Affordable Care Act of 2010. Costs, however, continue to rise, increasing the financial burdens on employers and employees alike. Although policymakers on both the left and right promote policies that would ultimately end the nation’s reliance on ESI as a primary source of insurance coverage, such shifts would likely result in considerable disruption and currently do not have widespread political support. For policymakers across the political spectrum, strategies intended to strengthen ESI may thus be considered a reasonable way to address cost challenges.

Policymakers and other stakeholders should take steps in four areas. First, they should increase transparency in the health care system. Information about prices for products and services is readily available in most markets, but health care is a notable exception. A Congressional Budget Office (CBO) report on policy approaches to reduce what commercial insurers pay for hospital and physician services found that employers lack expertise needed to navigate a complex medical system and often outsource network design, price negotiation, and claims processing to consultants and other third parties. A lack of information about prices can also drive this outsourcing, thereby making employers somewhat price insensitive. More transparency could make employers better-informed purchasers. It also could lower prices, shape policy decisions, and make the delivery of health care more efficient. However, efforts to increase transparency for consumers have not done much to lower health care costs, nor have they generally incentivized consumers to compare prices and shop for better health care. Additionally, price transparency efforts do not require reporting on quality of care—an important factor when comparing health care providers and services. As such, greater transparency that includes both price and quality information will have its largest impact if policymakers, regulators, and health plans use it to enact policies to combat cost growth.

Second, policymakers and other stakeholders should empower employers to help lower costs by giving them payment and pricing tools that would help create a higher value ESI system that prioritizes employee health outcomes. To constrain prices and improve quality, policymakers should, through legislation and regulation, enable employers to design better provider networks.

Third, policymakers and other stakeholders should address problems in the private health care market. Negotiations between providers and payers shape market prices. Prices are also shaped by geography, the demand for services, the market power of providers and payers, and other factors. Employers often do not possess enough market power to negotiate lower prices due to the consolidation of health care providers. Provider consolidation continues to accelerate, with nearly 67% of hospital markets now considered highly or very highly concentrated. Consolidation often drives health care price increases, according to a large body of evidence. BPC has proposed policies to equalize market power dynamics to foster a more competitive employer-sponsored health insurance system.

Finally, policymakers should consider other legislative and regulatory steps to make health insurance more affordable. While more than 70% of workers, on average, accept employer-sponsored health care when it is offered, the figure is only 63% among firms that employ larger shares of lower-wage workers, such as part-time and temporary workers. Employees at firms with more low-wage workers pay higher premiums as a share of their incomes than employees at firms with fewer low-wage workers. These figures suggest that ESI remains less affordable, and as a result perhaps less desirable, for lower-wage employees. The administration could consider providing guidance on and make improvements to alternatives to traditional group health plans that allow employers to offer more affordable coverage to their employees.