Private Health Insurance: Impact of Premium Increases on Number of Covered Individuals Is Uncertain

Published by the Government Accountability Office on 1999-06-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Employer-Employee
                          Relations, Committee on Education and the Workforce,
                          House of Representatives

For Release on Delivery
Expected at 9:30 a.m.
Friday, June 11, 1999
                          PRIVATE HEALTH

                          Impact of Premium
                          Increases on Number of
                          Covered Individuals Is
                          Statement of William J. Scanlon, Director
                          Health Financing and Public Health Issues
                          Health, Education, and Human Services Division

Private Health Insurance: Impact of
Premium Increases on Number of Covered
Individuals Is Uncertain
              Mr. Chairman and Members of the Subcommittee:

              Approximately 150 million individuals obtained health insurance through
              the work place in 1996, either through their own employer or the employer
              of a family member. During the last several years, an increasing number of
              these individuals have enrolled in some form of managed care rather than
              in fee-for-service plans. Recently, concerns have grown regarding the ways
              in which some managed care plans operate and the adequacy of the
              information that plans and their providers share with members.

              In response to these concerns, several legislative proposals have been
              made to require health insurance plans to adopt specified operational
              practices. The proposals apply to all types of plans but would likely have
              their greatest impact on health maintenance organizations (HMO). Other
              types of plans—such as preferred provider organizations (PPO) and
              indemnity, or fee-for-service, plans—will likely be affected to a lesser
              degree. Included in the various proposals are requirements, for example,
              to disclose certain information,1 guarantee patient access to emergency
              and specialty services, implement internal and external grievance policies,
              and guarantee freedom of communication between providers and patients.
              Some lawmakers are concerned, however, that these types of mandates
              could increase the cost of health insurance and have the unintended
              consequence of reducing the number of individuals covered by private
              health insurance.

              To help inform congressional consideration of these proposals, you asked
              us to present the findings of a study we did for Senator Jeffords last July
              that analyzed the relationship between private insurance premium
              increases and changes in the number of covered lives.2 My remarks today
              are based on that study. Specifically, I will focus on (1) the trends in
              employers’ decisions to offer insurance and employees’ decisions to
              purchase it, (2) an assessment of recent studies that have estimated the
              relationship between premium increases and insurance coverage, and
              (3) conditions or factors that could affect the impact of premium increases
              on insurance coverage.

               Legislative proposals would require each plan to disclose, for example, information on appeals
              procedures, restrictions on reimbursement for care received outside of the plan’s network of
              providers, and the location of plan providers and facilities.
              Private Health Insurance: Impact of Premium Increases on the Number of Covered Individuals Is
              Uncertain (GAO/HEHS-98-203R, July 7, 1998).

              Page 1                                                                         GAO/T-HEHS-99-147
             Private Health Insurance: Impact of
             Premium Increases on Number of Covered
             Individuals Is Uncertain

             In summary, from the late 1980s to the mid-1990s—a period of rising
             health insurance premiums—the proportion of employees offered
             coverage rose from about 72 percent to 75 percent, while the share that
             accepted insurance fell from approximately 88 percent to 80 percent. The
             extent to which various factors contributed to the fall in the acceptance
             rate is unclear. It may have resulted from employees being asked to pay a
             larger share of the premiums or other factors, such as decreases in some
             workers’ real income. Medicaid-eligibility expansions and changes in
             benefit levels also may have contributed to the fall in the acceptance rate.

             Few studies have attempted to estimate the effects of premium increases
             on insurance coverage, and no study adequately estimates the coverage
             loss that might result from new legislative mandates. Studies by the Lewin
             Group, for example, suggest that 300,000 to 400,000 individuals might drop
             or lose insurance coverage if premiums increased 1 percent. However,
             these estimates assume across-the-board premium increases. The potential
             coverage loss might be much lower if mandates primarily affect HMO
             premiums and employers and employees can switch to different types of
             coverage. Furthermore, serious data limitations affect the precision of
             many of these studies’ estimates.

             Finally, many factors can affect the impact that health insurance mandates
             have on the number of individuals covered by private insurance. For
             example, if new mandates result in changes that individuals consider
             worthwhile, they may be willing to pay higher premiums. The extent to
             which employers pass on premium increases to employees, employees’
             opportunities to switch to less expensive plans, and changes in economic
             factors—such as income or changes in public insurance program eligibility
             requirements—can also affect the number of individuals with private
             health insurance.

             Between 1995 and 1997, real health insurance premiums (adjusted for
Background   inflation) remained nearly constant or fell slightly across all plan types.
             (See table 1.) This represents a sharp decline from the previous 5
             years—in 1990, inflation-adjusted growth was as high as 11.6 percent for
             indemnity plans and 10.6 percent for HMOs. In 1998, premiums increased
             for all insurance types, but the increase was much lower than was
             experienced in the early 1990s.

             Page 2                                                      GAO/T-HEHS-99-147
                                     Private Health Insurance: Impact of
                                     Premium Increases on Number of Covered
                                     Individuals Is Uncertain

Table 1: Percentage of Real Annual
Growth in Premiums, by Type of       Plan type                1991      1992       1993      1994       1995      1996      1997       1998
Health Plan, 1991 to 1998            Indemnity                  7.8        8.0       5.5       2.5      –0.1       –1.8        0.3          1.9
                                     PPO                        5.9        7.6       5.2       0.6        0.7      –2.4      –0.2           2.3
                                     HMO                        7.9        6.8       5.3       2.7      –2.4       –3.4      –0.3           1.3
                                     Sources: GAO calculations based on data from KPMG Peat Marwick (1991-98) and Bureau of
                                     Labor Statistics’ Consumer Price Index. Includes employer and employee shares of premiums for
                                     workers in private firms with at least 200 employees.

                                     In 1996, about 70 percent of the population under age 65 was covered by
                                     health insurance purchased through an employer or union or purchased
                                     privately as an individual, according to Current Population Survey (CPS)
                                     data. About 12 percent was covered by Medicare, Medicaid, or the Civilian
                                     Health and Medical Program of the Uniformed Services, and about
                                     18 percent was uninsured. From 1989 to 1996, the percentage of the
                                     population covered by employer-sponsored, union-sponsored, or
                                     individual insurance3 decreased slightly, but these options still remained a
                                     prominent source of coverage for people under age 65. (See fig. 1.) During
                                     the same period, the proportion of the population covered by Medicaid
                                     and the proportion without insurance both increased.

                                      Individual insurance is coverage that an individual purchases directly from an insurer or through a

                                     Page 3                                                                          GAO/T-HEHS-99-147
                                        Private Health Insurance: Impact of
                                        Premium Increases on Number of Covered
                                        Individuals Is Uncertain

Figure 1: Sources of Health Insurance
for People Under Age 65, 1989 and

                                        Sources: U.S. Bureau of the Census, CPS (March 1989 to March 1997).

                                        Recent studies suggest that employers typically do not stop offering health
More Workers Were                       insurance when premiums increase. Between 1988 and 1996, health
Offered Insurance, but                  insurance premiums—unadjusted for inflation—increased by about
Fewer Accepted                          8 percent per year on average. During approximately the same time period,
                                        one study found that the fraction of workers offered insurance by their
Coverage as                             employers grew slightly, from 72.4 percent to 75.4 percent.4 The
Premiums Increased                      proportion of workers who had access to employer-sponsored insurance,
                                        either through their own employer or the employer of a family member,
                                        remained essentially constant at about 82 percent. Another study reported

                                         P. Cooper and B. Schone, “More Offers, Fewer Takers for Employment-Based Health Insurance: 1987
                                        and 1996,” Health Affairs 16(6) (Nov./Dec. 1997).

                                        Page 4                                                                     GAO/T-HEHS-99-147
Private Health Insurance: Impact of
Premium Increases on Number of Covered
Individuals Is Uncertain

that the fraction of small firms (those with fewer than 200 employees)
offering insurance coverage grew from 46 percent in 1989 to 49 percent in
1996.5 The study also found that 99 percent of large firms offered
insurance in 1996.

Fewer workers, however, are choosing to accept employer-sponsored
coverage for themselves or their dependents. In 1987, 88.3 percent of
workers accepted coverage when their employers offered it. In 1996, only
80.1 percent of workers accepted coverage. The fall in the acceptance rate
was relatively large for workers under age 25 (from 86.5 percent to
70.1 percent) and those making $7 per hour or less (from 79.7 percent to
63.2 percent). The fraction of workers who accepted employer-sponsored
insurance either through their own job or that of a family member also
declined, from 93.2 percent to 89.1 percent. Consequently, even though a
greater percentage of employers offered insurance, a smaller proportion of
workers was covered by employer-sponsored insurance in 1996 compared
with 1987.

The fall in the acceptance rate may be attributable partly to required
increases in employees’ insurance premium contributions. One study
found that employees in small firms paid an average of 12 percent of single
coverage premiums in 1988 and employees in large firms paid 13 percent.6
In 1996, the employee share had risen to 33 percent in small firms and
22 percent in large firms. According to the Lewin Group, the combined
effect of the increase in premiums and the increase in the employees’
share of those premiums resulted in workers paying 189 percent more in
real terms for single coverage and 85 percent more in real terms for family
coverage in 1996 compared with 1988.

Other factors also may have contributed to the drop in the acceptance
rate. A decline in real wages for some workers may have made coverage
less affordable. Expansions in Medicaid eligibility provided a coverage
alternative for some families and may have decreased workers’ willingness
to accept employer-sponsored insurance. Furthermore, possible changes
in benefit packages may have made coverage less desirable.

 P. Ginsburg and others, “Tracking Small-Firm Coverage, 1989-1996,” Health Affairs
17(1) (Jan./Feb. 1998).
J. Gabel and others, “Small Employers and Their Health Benefits, 1988-1996: An Awkward
Adolescence,” Health Affairs 16(5) (Sept./Oct. 1997).

Page 5                                                                        GAO/T-HEHS-99-147
                         Private Health Insurance: Impact of
                         Premium Increases on Number of Covered
                         Individuals Is Uncertain

                         Relatively few studies have analyzed the relationship between an increase
Study Designs Limit      in the cost of insurance and the change in the number of individuals
the Ability to Predict   covered. Several studies have examined the extent to which insurance
Potential Coverage       premium subsidies might affect employers’ decisions to offer insurance,
                         but these results do not directly address the question of how much
Loss From New            coverage loss might arise from an increase in premiums. The relevance of
Health Insurance         two studies that attempted to answer this question is limited because of
                         implicit assumptions embedded in the studies’ designs and shortcomings
Requirements             in the available data.

                         In November 1997, the Lewin Group estimated that 400,000 fewer people
                         might be covered by health insurance if new legislation caused premiums
                         to rise by 1 percent. Its estimate was largely based on studies of the effects
                         of insurance premium subsidies on employers’ decisions to offer
                         insurance. These studies focused primarily on small employers and varied
                         widely both in their research questions and their findings. The Lewin
                         Group selected a midpoint estimate from a range of estimates it judged to
                         be the best available. It then adjusted the estimate to account for the
                         likelihood that individuals might obtain insurance through working family
                         members’ policies, the individual insurance market, or public insurance
                         programs if premiums rose on their employer-sponsored policies.
                         However, the Lewin Group’s estimate of potential coverage loss did not
                         consider the possibility that employers or employees might switch to
                         different types of insurance products if one type became relatively more
                         expensive. Because many of the proposed federal mandates are expected
                         primarily to affect HMOs and have little or no impact on PPOs and indemnity
                         plans, Lewin’s estimate may overstate the potential coverage reduction.

                         To correct for some shortcomings of its earlier study, the Lewin Group
                         performed its own data analysis and released the findings in January 1998.
                         The results indicated a lower potential coverage loss of 300,000 individuals
                         for every 1 percent increase in premiums.7 The findings of the 1998 Lewin
                         Group’s analysis, however, may have been affected by data limitations.
                         Specifically, the analysis rests on an accurate measure of health insurance
                         premiums paid by employees. Because this information was unavailable,
                         the Lewin Group had to impute this amount. In addition, two aspects of
                         the study’s design limit its ability to predict insurance coverage reductions

                          The new estimate was based on the Lewin Group’s statistical analysis of the relationship between
                         what employees paid for insurance and the probability that they, their spouses, and their dependent
                         children would have employer-sponsored health insurance. Lewin used complex statistical models to
                         estimate the proportion of the population covered by employer-sponsored insurance grouped by a
                         number of demographic characteristics, including race, age, income, full-time/part-time status,
                         occupation, industry, firm size, and the imputed employee share of the premium costs.

                         Page 6                                                                        GAO/T-HEHS-99-147
                          Private Health Insurance: Impact of
                          Premium Increases on Number of Covered
                          Individuals Is Uncertain

                          that might result from new legislative mandates. First, the coverage loss
                          estimate—just as in the first study—applies to situations where all
                          premiums increase by 1 percent. A 1-percent increase in HMO premiums
                          would likely result in a smaller coverage reduction if employers and
                          employees switched to other types of health coverage. Second, the Lewin
                          Group explicitly assumed that all observed coverage changes resulted
                          from employees’ decisions to not accept coverage.8 This assumption is
                          broadly supported by findings from other studies. However, to the extent
                          that some employers decided to no longer offer insurance, the Lewin
                          Group’s estimate incorrectly predicts employees’ reactions to changes in

                          Insufficient information is currently available to accurately predict the
Multiple Factors          reduction in the number of individuals covered by private insurance
Affect Potential          (referred to as coverage changes) that may result from health insurance
Impact of Premium         premium increases associated with new federal mandates. One problem is
                          that estimates of the effects of mandates on premiums have some
Increases on Number       uncertainty. However, even if the premium increase was known with
of Covered                certainty, previous research and economic theory suggest that the impact
                          on coverage depends on a number of conditions. Coverage changes will
Individuals               depend on the extent to which premiums rise for employees and whether
                          they can switch to insurance plans less affected by the mandates. The
                          specific policy adopted also can affect how employees respond to
                          resulting premium increases. Finally, changes in many economic and other
                          factors can cause coverage changes that mask or exaggerate the impact of
                          premium increases. The following list describes several conditions that
                          could affect observed changes in health insurance coverage if new federal
                          mandates increase insurance costs.

                      •   The percentage of premiums paid by employees and the amount of any
                          premium increase that employers pass on to employees. If, as recent
                          evidence suggests, employees’ decisions largely affect the extent of
                          coverage, then the relevant price increase is the percentage increase in
                          their contribution. For example, about two-thirds of employees in small
                          firms had to contribute toward premium costs in 1996. Those employees
                          paid about 50 percent of the total premium. If total premiums rise by
                          1 percent and employers pass on the full increase to employees, then the
                          employees’ contribution would rise by 2 percent.

                           The data used in the Lewin study do not indicate whether observed coverage losses are the result of
                          employers’ decisions not to offer insurance or employees’ decisions not to accept it.

                          Page 7                                                                         GAO/T-HEHS-99-147
                  Private Health Insurance: Impact of
                  Premium Increases on Number of Covered
                  Individuals Is Uncertain

              •   The extent to which additional benefits are valued by consumers. If higher
                  insurance premiums are the result of additional benefits that consumers
                  value, then any coverage loss will be less than the coverage loss that might
                  occur if premiums increased but benefits stayed the same (or the
                  additional benefits had little consumer value). In a November 1997 letter,
                  the Lewin Group noted that its “estimates of the number of persons losing
                  coverage will differ depending upon the health policy being analyzed” and
                  pointed out that “some proposals that increase premium costs are often
                  associated with other provisions that may either lessen or intensify
                  incentives for individuals to drop coverage.”
              •   The extent to which employees can switch plans that have no or low
                  premium increases. Proposed new federal mandates are expected
                  primarily to increase costs for HMOs. Faced with a rise in HMO premiums,
                  some employees may switch to PPOs or indemnity insurance rather than
                  drop coverage entirely.
              •   Changes in other insurance benefits. Instead of raising premiums in
                  response to new mandated benefits, insurance companies and employers
                  may find ways to reduce other parts of the insurance package to keep
                  premiums constant. It is unknown how employees might respond to such
                  changes in their insurance plans.
              •   Changes in real wages and other factors. Changes in economic conditions
                  or eligibility for public insurance programs can also affect private
                  insurance coverage. For example, the Lewin Group estimated that a
                  1-percent rise in real income could increase private insurance coverage by
                  nearly 0.37 percent (about 550,000 workers and dependents). Likewise,
                  expansions in Medicaid eligibility could cause some workers to substitute
                  public insurance for employer-sponsored family coverage.

                  The extent to which new legislative requirements for health insurance
Conclusions       providers could affect the number of individuals with insurance coverage
                  depends on the answers to several questions. To what extent will insurers
                  raise premiums? Will fewer employers offer coverage to their employees,
                  or will employers pass some or all of the increased premium costs onto
                  their employees? How many employees will decline offered coverage if
                  they must pay higher premiums?

                  The available studies offer only limited insights into these issues and
                  illustrate the difficulty of estimating how the number of individuals
                  covered by health insurance might be affected. Many of the studies we
                  reviewed were hampered by incomplete data. Moreover, the design of the
                  studies and the assumptions they incorporated limit their applicability to

                  Page 8                                                     GAO/T-HEHS-99-147
                  Private Health Insurance: Impact of
                  Premium Increases on Number of Covered
                  Individuals Is Uncertain

                  the current issue. Studies by the Lewin Group, for example, estimate
                  coverage loss that might result from an across-the-board premium
                  increase. Legislation that affected some types of insurance providers’ costs
                  more than others might have a much smaller impact if beneficiaries can
                  switch from plans with larger premium increases to plans with smaller
                  premium increases. Finally, a host of other factors—including, for
                  example, the extent to which individuals value the results of the specific
                  mandates and general economic conditions—will likely play a role in
                  determining the impact that legislative mandates have on the number of
                  insured individuals.

                  Mr. Chairman, this concludes my prepared statement. I will be happy to
                  answer any questions.

                  For future contacts regarding this testimony, please call William J. Scanlon
GAO Contact and   at (202) 512-7114. Key contributors to this testimony include James C.
Acknowledgments   Cosgrove and Susanne M. Seagrave.

(101859)          Page 9                                                     GAO/T-HEHS-99-147
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