Employer-Sponsored Health Insurance: Down but Not Out

Originally published as Issue Brief No. 137 by the Center for Studying Health System Change (HSC), 2010. Authors: Jon B. Christianson, Ha T. Tu, Divya R. Samuel. HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

The sharp economic downturn that began in 2008 forced employers across the country to rethink their health benefit strategies, but predictions of the demise of employer-sponsored coverage proved premature, according to findings from HSC's Community Tracking Study site visits. While the recession pushed many employers to accelerate cost-containment measures and some smaller firms reduced or dropped coverage, the employer-based insurance system showed more resilience than many observers expected. At the same time, employers were closely watching the implementation of national health reform to understand how the Affordable Care Act would reshape their role in providing coverage.

Employers Adapt to Economic Pressures

Faced with the unexpected severity of the recession, employers of all sizes reconsidered their approach to health benefits. Large employers continued to offer coverage but adopted aggressive cost-management tactics including higher deductibles and copayments, greater use of consumer-directed health plans, more stringent pharmacy benefit management, and wellness and disease management programs. Some large firms narrowed their provider networks or moved to tiered network structures that steered employees toward lower-cost providers. Small and mid-sized employers faced the most acute pressures, with some reducing benefit generosity, increasing employee premium contributions, or in the most extreme cases, discontinuing coverage altogether.

The distinction between large and small employers mattered enormously. Large firms (generally those with 200 or more workers) had the scale and negotiating power to self-insure, diversify their plan offerings, and demand concessions from health plans and providers. Small firms purchasing coverage in the fully insured market had far fewer levers. They faced premium increases that reflected the health status of their specific employee pool, and their options for cost containment were more limited. The result was a growing divergence in the employer coverage landscape, with large-firm coverage remaining relatively stable while small-firm coverage eroded at the margins.

Variation Across Local Markets

The recession's impact on employer-sponsored insurance varied significantly across the 12 communities HSC tracked. Markets with economies heavily dependent on manufacturing, construction, or housing bore the greatest damage. Communities such as Lansing, Michigan, and Cleveland, Ohio, where large manufacturing employers had been shedding workers and cutting benefits for years, saw the recession accelerate trends already well underway. In contrast, markets with more diversified economies or dominant sectors that held up relatively well during the downturn -- including government, health care, and education -- experienced less disruption to employer coverage.

Local variation also reflected differences in the health plan and provider markets. In communities where one or two insurers dominated, employers had limited ability to shop for better deals. Where provider consolidation had given hospitals and physician groups significant market power, employers and their health plans faced steeper price increases regardless of the broader economic climate. These structural differences meant that national policy prescriptions would play out differently from one community to the next.

Preparing for Health Reform

As the Affordable Care Act moved through Congress and into early implementation, employers were evaluating how the law would affect their coverage decisions. Large employers generally expected to continue offering health benefits, both because of the employer mandate penalty and because competitive labor markets still required attractive benefit packages. But some smaller firms, particularly those with lower-wage workforces, saw the ACA's insurance exchanges and premium subsidies as a potential alternative to providing coverage directly. The concern was not an immediate mass exodus from employer-sponsored insurance but rather a gradual erosion at the margins, particularly among firms for which the economics of offering coverage were already marginal.

The study found that the existing variation in employer-sponsored coverage across communities suggested that the impact of national health reform would likewise vary substantially from place to place. Markets where employer coverage was already weak would likely see the greatest shifts as new coverage options became available, while markets with strong employer-based systems would be more resistant to change.

Sources and Further Reading

This Issue Brief was based on HSC's Community Tracking Study site visits to 12 metropolitan communities. The research was conducted by Jon B. Christianson, Ha T. Tu, and Divya R. Samuel. The Community Tracking Study was supported by the Robert Wood Johnson Foundation. Supplementary data sources included the Kaiser Family Foundation/Health Research and Education Trust annual employer survey and the Medical Expenditure Panel Survey.