Premium Subsidies for Employer-Sponsored Health Coverage

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Premium Subsidies for Employer-Sponsored Health Coverage: An Emerging State and Local Strategy to Reach the Uninsured

Issue Brief No. 47 — December 2001

Leslie Jackson Conwell, Ashley C. Short

With roughly three-quarters of uninsured Americans living in households with at least one full-time worker, policymakers at both the state and local levels were exploring strategies to extend coverage by subsidizing employer-sponsored insurance. By the time HSC conducted its 2000-01 community site visits, half of the 12 nationally representative communities being tracked had premium assistance programs either planned or underway. This Issue Brief by Leslie Jackson Conwell and Ashley C. Short examined the operational challenges, design trade-offs, and early enrollment experiences of these subsidy programs.

Why Premium Assistance Attracted Policy Interest

Premium subsidies for employer-sponsored coverage appealed to policymakers for several reasons. Combining public funds with employer contributions stretched limited government dollars further and potentially covered more people than fully public programs. Because the subsidies built on the employer-based insurance system — the primary source of coverage for nonelderly adults — they helped reduce the stigma sometimes associated with public insurance. And they allowed children and parents to share the same source of coverage, which research indicated increased the likelihood that families would seek needed medical care.

Recent legislative developments had boosted interest further. The State Children's Health Insurance Program (SCHIP) permitted states to use SCHIP funds to subsidize eligible families' employer-offered health coverage. The Bush Administration's Health Insurance Flexibility and Accountability (HIFA) initiative encouraged states to use Medicaid and SCHIP funds to subsidize private insurance for low-income populations. Programs observed in HSC study sites fell into three categories: federal-state partnerships using Medicaid or SCHIP funds (such as programs in Massachusetts and New Jersey), state programs using state funds only (such as Healthy New York), and local programs combining county, federal, and state resources (such as a proposed program in Lansing, Michigan).

Operational Challenges in Program Design

Designing a workable benefits package proved difficult. Programs using federal funds had to comply with SCHIP or Medicaid benefit requirements, which were often more generous than typical small-employer plans. Massachusetts found that very few applicants had access to an employer-sponsored plan that met SCHIP benefit standards. Some programs addressed this gap by offering wraparound packages to supplement employer plans, but this added administrative complexity. State-funded programs had more flexibility but smaller budgets, leading some to exclude benefits such as maternity care or chiropractic services to keep costs manageable.

Preventing substitution — ensuring that subsidies did not replace existing private contributions to coverage — was another major concern. Programs used look-back periods to exclude individuals who had recently had private insurance and required minimum employer premium contributions, typically ranging from 40 to 60 percent. The risk was that employers might reduce their contributions to the required minimum, shifting costs to public funds and potentially making coverage less affordable for other workers who did not qualify for subsidies.

Modest Enrollment Despite High Hopes

Early enrollment fell well short of projections. Massachusetts had aimed to enroll 100,000 people in its first full year but had only 12,000 after 17 months. New York's Healthy New York program, launched in January 2001, had slightly more than 1,000 enrollees by August. Employers perceived the subsidies as too small to significantly offset costs, and some were skeptical that funding would continue beyond the initial period. Employees faced their own barriers: reluctance to disclose their income status to employers, narrow open-enrollment windows that limited sign-up opportunities, and income fluctuations that could cause eligibility to change from month to month.

New Jersey's FamilyCare program found a practical solution to one barrier: when focus groups revealed that employers were concerned about administrative burden, the program began sending subsidies directly to employees rather than routing them through the employer. Some policy experts also proposed making program eligibility a qualifying event that would allow off-cycle enrollment, similar to marriage or the birth of a child.

Policy Implications

Premium subsidy programs represented a creative approach to expanding coverage by combining public and private resources. But early experience demonstrated that they were expensive to design and operate, subject to complex federal and state regulatory requirements, and had not yet attracted enthusiastic participation from either employers or workers. Looking ahead, the combination of a slowing economy, strained public budgets, and rising premiums could increase demand for these programs while making the trade-offs between benefit generosity and enrollment breadth even more acute. Policymakers would need to manage expectations about what premium assistance could accomplish and be prepared to make difficult choices about program scope and sustainability.

Sources and Further Reading

AHRQ — Federal health care quality research agency.

Health Affairs — Peer-reviewed health policy research.

Robert Wood Johnson Foundation — Health policy research.

Commonwealth Fund — Research on health care quality.