United States General Accounting Office

GAO Report to the Chairman, Committee on

Labor and Human Resources, U.S.

Senate

July 1997 PRIVATE HEALTH

INSURANCE

Continued Erosion of

Coverage Linked to

Cost Pressures

GAO/HEHS-97-122

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-276643 

July 24, 1997

The Honorable James M. Jeffords

Chairman, Committee on Labor

 and Human Resources

United States Senate

Dear Mr. Chairman:

In response to your request, this report provides information on major trends in the private

health insurance market during the 1980s and 1990s. Specifically, the report discusses the

decline in private health insurance coverage and factors contributing to this decline, trends in

health insurance premiums and reasons for these trends, and employers’ efforts to control

health benefits costs.

We are sending copies of the report to interested congressional committees and are making

copies available to others on request.

This report was prepared under the direction of Michael Gutowski, Assistant Director, who may

be reached at (202) 512-7128 if you or your staff have any questions. Other major contributors to

this report are listed in appendix III.

Sincerely yours,

Jonathan Ratner

Associate Director, Health Financing

 and Systems Issues
Executive Summary

Purpose Spending on private health insurance represents one-third of all U.S.

health expenditures—or nearly 5 cents of every dollar spent in the United

States. This significant share of the U.S. economy provides health

coverage for 7 of every 10 Americans. During the past decade, private

health insurance has undergone fundamental changes in who is covered,

how much coverage costs, and the type of coverage Americans receive. To

better understand the major trends in private health insurance during the

1980s and 1990s, the Chairman of the Senate Committee on Labor and

Human Resources asked GAO to report on

• trends in the number of people covered by private health insurance and

factors affecting health coverage rates and

• changes in health insurance premiums, including reasons for these

changes and efforts to control the costs of providing health benefits.

Background Most Americans rely on private health insurance to help pay for medical

expenses. More than 90 percent of people with private health insurance

coverage have access to group insurance through employment. However,

some people, particularly those unable to get employment-based health

benefits, purchase health insurance directly in the individual insurance

market. While the premium cost of employment-based coverage is

generally shared by the employer and the employee, participants in the

individual market must absorb the entire premium costs out of pocket.

Results in Brief Private health insurance coverage has slowly but steadily declined.

Between 1980 and 1995, the population under age 65 covered by private

health insurance decreased from 79.5 percent to 70.5 percent. (In 1995,

about 164 million persons under age 65 were covered by private health

insurance.) This trend has continued even though the U.S. economy has

been strong and employment has grown. Coverage for children, early

retirees, and near-poor families has declined faster than that for the overall

population. For example, just from 1989 to 1995 the level of private health

coverage for children declined by 7 percentage points compared to a

decline of 4.5 percentage points in the overall population under 65.

Declining private health coverage has been accompanied by growth in the

uninsured population and Medicaid enrollment, which in turn increased

government health expenditures. The proportions of the population under

age 65 that are uninsured or are Medicaid recipients increased by 5.5 and

4.3 percentage points, respectively, between 1980 and 1995. A major

reason for declining private health coverage is the rising cost of health

Page 2 GAO/HEHS-97-122 Private Health Insurance Trends
Executive Summary

insurance. This has absorbed a growing share of business and family

incomes and has influenced employers and employees’ health insurance

decisions. Other factors that contribute to declining coverage include

shifts in employment patterns, low growth in real family income, and the

indirect effects of expanded Medicaid coverage.

Health insurance premiums, in contrast, have alternated between rapid

growth and relative stability over the past two decades. During the late

1980s, employers faced sharply rising health insurance premiums. In

contrast, premium growth rates have decelerated in the 1990s and

remained relatively stable in recent years. It is unclear whether this

stability in premiums is likely to continue. Several reasons cited as

contributing to the recent near-zero growth in health plan premiums

include the cyclical nature of health insurance premiums, the expansion of

managed care, the increasingly competitive market for health insurance,

and low overall inflation. Nonetheless, the high level of health insurance

costs and uncertainty about future increases remain a concern of

employers and individuals purchasing coverage. For example, in 1996,

average annual premiums for family coverage ranged from $5,071 for a

health maintenance organization (HMO) plan to $5,388 for an indemnity

plan. Average premiums for family coverage have more than doubled since

1988.

As employers have adopted various strategies to control the costs of

health benefits, the costs consumers bear have increased and the types of

health insurance products they receive has evolved. Since 1980, employees

are more likely to be required to pay a share of their health plans’

premiums—typically 20 to 30 percent. In addition, most Americans are

now enrolled in a network-based plan. A network-based plan requires or

encourages enrollees to use physicians and hospitals affiliated with the

plan. However, network-based plans often have lower deductibles, and

most of these plans allow enrollees to use nonaffiliated providers at a

higher cost. Finally, nearly 40 percent of persons with private

employer-based health insurance participate in a self-funded plan. In such

plans, unlike conventional health insurance, the employer assumes the

risk for health claims and the plan is exempt from state insurance

regulation.

If at some point health insurance costs start rising again, employers and

insurers will face heightened pressure to control costs. This may lead to

increased cost shifting from employers to employees, reduced benefits in

Page 3 GAO/HEHS-97-122 Private Health Insurance Trends
Executive Summary

employer-based health plans, and faster declines in the number of

employers offering health benefits.

Principal Findings

Private Health Coverage

Decreasing Across All

Segments of the

Population but at Higher

Rates Among Children,

Early Retirees, and the

Near Poor

Private health coverage gradually declined for many Americans between

1980 and 1995. During this period, the population under 65 with private

health insurance fell by 9 percentage points (from 79.5 percent to 70.5

percent). This decline was accompanied by an increase in the numbers of

nonelderly Americans who are uninsured or covered by Medicaid. The

uninsured as a percentage of Americans under age 65 increased from 11.8

percent in 1980 to 17.3 percent in 1995—over 40 million Americans in

1995. Similarly, Medicaid enrollment among the population under 65 grew

from about 8.2 percent to 12.5 in the same period.

The erosion of private health insurance has affected people in nearly all

demographic and employment categories, but children, early retirees, and

near-poor families experienced the greatest decline in coverage. Health

coverage for children decreased by 7 percentage points, from about 73

percent to 66 percent between 1989 and 1995, compared to a 4.5

percentage point decline for the overall nonelderly population during this

period. If children’s private health insurance coverage had remained at the

1989 level, nearly 5 million more children would have been covered by

private health insurance in 1995. Similarly, private health coverage rates

for retirees under age 65 dropped from nearly 76 percent in 1989 to

69 percent in 1995. While private coverage also decreased for families

between 100 and 200 percent of the federal poverty level, some children

and pregnant women in this income range gained Medicaid coverage.

Rising Health Care Costs a

Key Factor in the Decline

in Health Coverage

A number of factors have contributed to the decline in private health

coverage for specific time periods. Among the reasons researchers cite are

rising health care costs, shifts in employment patterns, low rates of growth

in real family incomes, and the indirect effects of expanded Medicaid

coverage. Health care cost increases have affected employers’ decisions to

limit or drop coverage for employees and to increase employees’ share of

health insurance costs, as well as employees’ decisions to purchase health

coverage. No single study has measured the effect these factors had

throughout the 1980s and 1990s. The extent to which Medicaid expansions

Page 4 GAO/HEHS-97-122 Private Health Insurance Trends
Executive Summary

have caused private health coverage to decline as opposed to covering

people who otherwise would have been uninsured is still in dispute.

Rapid Growth in Health

Insurance Premiums

During the Late 1980s

Followed by Recent

Near-Zero Growth

Private health insurance premiums have exhibited a cyclical growth

pattern over the past two decades. Premium growth rates increased

sharply during the late 1980s, but growth rates decelerated throughout the

1990s. For example, real premium growth rates of indemnity, preferred

provider organization (PPO), and HMO plans peaked at 15.2, 13.2, and

11.2 percent, respectively, in 1989. Real premium growth rates slowed to

an average of about 5 percent across all health plan types in 1993. Over the

past 2 years, health insurance premiums have grown at lower rates than

the overall price and medical price indexes.

Health experts attribute the declining growth in health insurance

premiums to several factors, including cyclical trends in the health

insurance industry. Since 1970, premiums have declined to near zero

growth in real terms in at least three periods. Periods of very low growth

in private health insurance premiums—similar to the current

situation—occurred around 1980 and 1986. Other factors often cited as

contributing to the slowdown in premium growth rates include the low

overall inflation rate of the past several years, the effects of managed care,

and the increasingly competitive market for health insurance from

purchasers’ seeking lower prices and insurers’ and HMOs attempting to gain

market share.

Some health analysts maintain that recent declines show that health cost

growth has been tamed, but other analysts are beginning to discuss early

signs of potential premium increases. For example, Foster Higgins

reported that many HMOs have raised premiums because of sagging profits

and that most of the savings from managed care have already been

achieved. Thus, whether premium growth will rise or remain low is

unclear.

Employers’ Responses to

Rising Health Benefit Costs

Are Changing the Nature of

Private Health Insurance

Employers have adopted a variety of methods to address their high health

benefits costs, such as requiring employees to assume a greater share of

health plan costs, encouraging use of managed care plans, and self-funding

employee coverage. Some of these methods are changing the cost and

nature of private health insurance coverage for employees. For example,

the average share of premiums paid by employees for single coverage

more than doubled from 10 percent in 1988 to 22 percent in 1996.

Page 5 GAO/HEHS-97-122 Private Health Insurance Trends
Executive Summary

Three-quarters of people with employment-based health coverage are

enrolled in a network-based health plan. Most of this growth has occurred

in newer, hybrid types of managed care plans, such as PPOs and

point-of-service (POS) plans, which are less restrictive than traditional

HMOs.

In addition, many employers have self-funded their health plans, assuming

much of the risk for health claims directly rather than purchasing

insurance from a third party. In this way, the employer gains greater

control over the health plan, avoids costs associated with state taxes and

regulation, and can provide uniform benefits across states. However, the

plan is not subject to state oversight.

Concluding

Observations

Rising health care costs and the erosion of private employment-based

health insurance coverage have contributed to the rapid transformation of

America’s health insurance system. People who receive coverage through

private sector employment are paying a growing share of their health

plan’s premiums, but their out-of-pocket expenses have only increased

moderately. In addition, many people with employer-based coverage are

more likely to have some limitation in their choice of health plan or health

provider. Further, more people depend on Medicaid coverage or are

uninsured.

The erosion of private health insurance coverage has continued even

during years of national economic growth. Although health policy experts

are not anticipating the rapid increases in health costs of the late 1980s,

the extent of future changes in premium costs remain uncertain. Many of

the underlying pressures for rising health care costs, including an aging

society and new medical technologies, remain. If private health coverage

continues to erode, federal and state policy decisionmakers will be called

upon to tackle issues of access, affordability, and quality of health

insurance, particularly for children, early retirees, and near-poor families.

Recommendations GAO is making no recommendations in this report.

Comments From

Outside Reviewers

GAO obtained comments on a draft of this report from experts on private

health insurance. The reviewers agreed with the report and also provided

suggestions that GAO included where appropriate.

Page 6 GAO/HEHS-97-122 Private Health Insurance Trends
Page 7 GAO/HEHS-97-122 Private Health Insurance Trends
Contents

Executive Summary 2

Chapter 1 

Introduction

12

Private Health Insurance: A Significant Share of U.S. Health

Spending, Particularly for Private Businesses

12

Public Policy Has Shaped Private Health Insurance 14

Scope and Methodology 15

Chapter 2 

The Share of the

Population Under 65

With Private Health

Insurance Coverage

Has Slowly but

Steadily Declined

17

Declining Private Health Insurance Has Been Accompanied by

Growth in the Uninsured Population and in Medicaid Enrollment

17

Private Health Insurance Coverage Varies Among States and

Demographic, Income, and Employment Groups

19

Cost Pressures Are One of Many Factors Linked to Declining

Employer-Based Coverage

24

Chapter 3 

Sharp Increases in

Private Health

Insurance Premiums

Have Subsided, but

the Future Remains

Uncertain

27

Trends in Health Insurance Premium Growth Rates During the

1980s and 1990s

27

Managed Care and Cyclical Factors in the Health Insurance

Industry Among Major Causes of Slowdown in Premium Growth

Rates

29

Premiums for Individual Health Insurance Vary With

Demographic Traits, Health Status, and State Regulation

31

Chapter 4 

Employers’ Efforts to

Control Costs Have

Changed the Nature of

Private Health

Insurance

33

Employees Are Required to Pay an Increasing Share of Premiums

for Their Coverage

34

Network-Based Health Plans Have Become Prevalent, but Wide

Variation in Plan Types Remain

36

Employers Have Increasingly Self-Funded Their Health Benefits 40

Page 8 GAO/HEHS-97-122 Private Health Insurance Trends
Contents

Chapter 5 

Concluding

Observations

43

Appendixes Appendix I: Major Data Sources and Methodology for GAO

Estimates

44

Appendix II: Private Health Insurance Coverage Within

Population Categories, 1989 and 1995

52

Appendix III: Major Contributors to This Report 58

Related GAO Products 60

Tables Table 2.1: Summary of Studies Identifying Factors Contributing to

Declining Coverage

25

Table 3.1: Real Annual Growth in Premiums Per Health Plan,

1987-96

28

Table 3.2: Average Annual Health Insurance Premiums by

Employer-Sponsored Plan Type, 1996

29

Table 4.1: Characteristics of Health Insurance Plans 37

Table 4.2: Enrollment in Network-Based Health Plans by Type,

1980-95

39

Table I.1: GAO Estimates of Private Health Coverage Based on

the Current Population Survey, 1979-95

46

Table II.1: Share of Population Under Age 65 With Private Health

Insurance Coverage by State, 1989 and 1995

52

Table II.2: Share of Population Under Age 65 Covered by Private

Health Insurance, 1989 and 1995

54

Table II.3: Share of Population Under Age 65 Covered by Private

Health Insurance by Race or Ethnic Group, 1989 and 1995

54

Table II.4: Share of Population Under Age 65 With Private Health

Insurance Coverage by Annual Family Income, 1989 and 1995

55

Table II.5: Share of Population Under Age 65 With Private Health

Insurance Coverage by Percent of Poverty Level, 1989 and 1995

55

Table II.6: Share of Population Under Age 65 With Private Health

Insurance Coverage by Industry, 1989 and 1995

56

Table II.7: Share of Population Under Age 65 With Private Health

Insurance Coverage by Firm Size, Nonelderly Population, 1989

and 1995

56

Page 9 GAO/HEHS-97-122 Private Health Insurance Trends
Contents

Table II.8: Share of Population Under Age 65 With Private Health

Insurance Coverage by Employment Status, 1989 and 1995

57

Figures Figure 1.1: Businesses, Households, and Government All Pay for

Private Health Insurance

13

Figure 1.2: Private Health Insurance and National Health

Expenditures, 1980-94

14

Figure 2.1: Estimates of Private Health Coverage and Uninsured

Rates, 1980-95

18

Figure 2.2: Private Health Insurance Coverage by State, 1995 20

Figure 2.3: Uninsured Rates by State, 1995 21

Figure 3.1: Real Growth in Premiums by Health Plan Type,

1987-96

28

Figure 3.2: Change in Private Health Insurance Real Spending Per

Enrollee, 1970-95

30

Figure 4.1: Employer Private Health Insurance Spending as a

Percentage of Total Compensation, 1980-94

33

Figure 4.2: Employee Share of Premiums, 1988-96 34

Figure 4.3: Enrollment in Network-Based Health Plans by Type,

1980-95

38

Figure 4.4: Growing Share of Insured Workers and Dependents in

Self-Funded Health Plans, 1980-93

42

Figure I.1: Estimate of Private Health Coverage, Population

Under Age 65, 1979-95

47

Abbreviations

AAHP American Association of Health Plans

BLS Bureau of Labor Statistics

CPS Current Population Survey

ERISA Employee Retirement Income Security Act of 1974

HCFA Health Care Financing Administration

HIAA Health Insurance Association of America

HIPAA Health Insurance Portability and Accountability Act

HMO health maintenance organization

IPA independent practice association

POS point of service

PPO preferred provider organization

Page 10 GAO/HEHS-97-122 Private Health Insurance Trends
Page 11 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 1 

Introduction

The U.S. health insurance market is often characterized as a private,

employer-based system. Most Americans under age 65 participate in the

health insurance market through employer-based health plans, and

contributions to private health insurance represent the bulk of employer

spending on health care. Federal and state policy initiatives such as the

Employee Retirement Income Security Act of 1974 (ERISA) and state

legislation regulating the small employer health insurance market have

had major implications in the development of the private health insurance

market.

Private Health

Insurance: A

Significant Share of

U.S. Health Spending,

Particularly for

Private Businesses

Of the $950 billion spent on health care in the United States in 1994,

private health insurance accounts for about one-third ($313 billion).

Businesses paid for the majority of these private health insurance costs,

but individuals and federal, state, and local governments paid for over 40

percent of total spending on private health insurance.1

 (See fig. 1.1 for

distributions of total health spending by businesses, households, and

government and the share spent by each for private health insurance.)

Moreover, about one-third of what businesses paid for private health

insurance—an estimated $65 billion in 1996—is returned in the form of tax

subsidies resulting from the tax deductibility of employer health insurance

expenses.

1

Individuals pay for the employee share of employment-based private health insurance and the entire

cost of individually purchased coverage. Federal, state, and local governments contribute to the

premium costs of their employees’ health benefits. For more details on health spending by sector, see

Cathy A. Cowan and others, “Business, Households, and Government: Health Spending, 1994,” Health

Care Financing Review, Vol. 17, No. 4 (summer 1996), pp. 157-78.

Page 12 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 1 

Introduction

Figure 1.1: Businesses, Households, and Government All Pay for Private Health Insurance

36.0%

32.7%

25.4%

5.9%

Total Health

Expenditures, 1994

Government Household Business

0

20

40

60

80

100

Private Insurance

Government

Household Other

Business

18.5% 22.8%

74.4%

Percentage

Note: “Other” includes nonpatient revenues and research and construction.

Source: HCFA, Office of the Actuary.

Public health insurance, including Medicare and Medicaid, also represents

about one-third of total U.S. health spending. The remaining 36 percent of

health spending is not financed through health insurance but represents

out-of-pocket spending by consumers for copayments, deductibles, and

medical services not covered by insurance.2

Figure 1.2 shows the changes in health expenditures from 1980 to 1994 for

different categories of spending. Increases in health care expenditures

during this period stemmed from numerous factors, including changes in

medical technology, general price inflation, rising health care prices, the

aging of the population, and an increase in the overall population.

2

The remainder also includes research and construction costs and nonpatient revenues (such as

charitable donations).

Page 13 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 1 

Introduction

Figure 1.2: Private Health Insurance

and National Health Expenditures,

1980-94

1980 1985 1990 1994

0

20

40

60

80

100

Percentage

Private Health Insurance

Medicare and Medicaid

Other

46.1 42.6 39.8 35.6

31.5 26.5 26.9

25.7

28.2 30.9 33.3 33.0

Note: “Other” includes out-of-pocket spending; other federal, state, and local programs;

nonpatient revenues; and research and construction.

Source: HCFA, Office of the Actuary.

Public Policy Has

Shaped Private Health

Insurance

Both federal and state government policies have shaped the development

of private health insurance. Two major federal laws have influenced the

employer provision of health benefits. Since 1954, the tax code has

encouraged employment-based health coverage by making employer

health benefit payments tax-deductible and by excluding

employee-provided benefits from employees’ taxable income. ERISA allows

employers to offer uniform national health benefits by preempting states

from directly regulating employer benefit plans. As a result, states are

unable to directly regulate self-funded health plans but can regulate health

insurers.3

 Between 1990 and 1994, 45 states enacted legislation to increase

access and affordability of health insurance for small employers; by 1995,

3

For information on the implications of ERISA for private health insurance, see Employer-Based

Health Plans: Issues, Trends, and Challenges Posed by ERISA (GAO/HEHS-95-167, July 25, 1995).

Page 14 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 1 

Introduction

25 states had also enacted reforms in the individual market.4 States also

have required insurers to provide coverage for specific benefits, such as

mental health care, mammography screening, and services provided by

chiropractors and optometrists.5

 Recent federal legislation, the Health

Insurance Portability and Accountability Act of 1996 (HIPAA), has expanded

the federal role in regulating private health insurance and may set

precedents for further amendments to ERISA and the tax deductibility of

health insurance.

Scope and

Methodology

This report focuses on key trends in the number of people covered by

private health insurance and the cost of health coverage since 1980. We

also examined how efforts to control costs have resulted in changes to the

health coverage Americans receive. To examine overall changes in the

number of people covered, we analyzed data reported by the Bureau of the

Census’s Current Population Survey (CPS) from 1980 to 1995. Because of

changes in the CPS during this time, we adjusted the data for some years to

make them more comparable. While these adjustments enhance the

comparability of data on health coverage for the population under age 65,

we did not attempt to adjust data to make comparisons among regional,

employment, and demographic population groups. Instead, to examine

trends in coverage among these segments of the population, we analyzed

data from the CPS for 1989 and 1995—a period for which the data are

comparable without further adjustments.

To develop trend data on costs of coverage and changes in

employer-sponsored health benefits, we used data from a variety of

sources. We reviewed several employer surveys, including those

conducted by the Bureau of Labor Statistics (BLS), Foster Higgins, and

KPMG Peat Marwick to gain information on employment-based health

plans, including premiums and types of plans offered. Data on national

health spending are from the Health Care Financing Administration (HCFA).

In addition, we reviewed literature on reasons for declining health

coverage, changes in health costs, and private sector initiatives to control

costs. We also built on information from earlier GAO reports on private

health insurance. A list of related GAO reports is included at the end of this

4

For more information on state reforms in the small employer and individual health insurance markets,

see Health Insurance Regulation: Variation in Recent State Small Employer Health Insurance Reforms

(GAO/HEHS-95-161FS, June 12, 1995) and Private Health Insurance: Millions Relying on Individual

Market Face Cost and Coverage Trade-Offs (GAO/HEHS-97-8, Nov. 25, 1996).

5

For information on mandated benefits and other state requirements on health insurers, see Health

Insurance Regulation: Varying State Requirements Affect Cost of Insurance (GAO/HEHS-96-161,

Aug. 19, 1996).

Page 15 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 1 

Introduction

report. Appendix I provides a more detailed discussion of the data sources

we used and our methodology for making estimates. We conducted our

review from December 1996 to May 1997 in accordance with generally

accepted government auditing standards.

Page 16 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 2 

The Share of the Population Under 65 With

Private Health Insurance Coverage Has

Slowly but Steadily Declined

During the 1980s and 1990s, private health insurance has covered a

declining share of the population under age 65. The gradual decline in

private health coverage has been nearly universal, although children, early

retirees, and near-poor families have experienced somewhat greater

declines in coverage. Changes in employment patterns, low real growth in

family incomes, and expanded Medicaid coverage may have contributed to

the decline in private coverage, but the rapid increase in health insurance

premiums during much of this time period has made coverage less

affordable for many families and employers.

Declining Private

Health Insurance Has

Been Accompanied by

Growth in the

Uninsured Population

and in Medicaid

Enrollment

The slow but steady erosion of private coverage has resulted in significant

long-term increases in the uninsured population and increases in publicly

provided insurance. We estimate that between 1980 and 1995, the share of

the nonelderly population covered by private health insurance fell from

79.5 percent to 70.5 percent.6

 (See fig. 2.1.) While most Americans under 65

continue to have private health insurance—164 million people in

1995—nearly 21 million more would have had private health insurance if

coverage had remained at the 1980 level.

6

Our estimates of health insurance coverage rates are based on data from the Bureau of the Census’s

CPS for the period 1979 to 1996. However, changes in the survey methodology make comparisons of

coverage rates over time difficult. Appendix I discusses how we adjusted the CPS data prior to 1992 to

make them more comparable with the recent CPS data on health insurance coverage.

Page 17 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 2 

The Share of the Population Under 65 With

Private Health Insurance Coverage Has

Slowly but Steadily Declined

Figure 2.1: Estimates of Private Health Coverage and Uninsured Rates, 1980-95

Note: Data were adjusted to account for changes in survey methodology. See app. I.

Source: GAO estimate based on Bureau of the Census data.

An increase in the share of the population under 65 that is uninsured or

covered by Medicaid has accompanied this decline in private coverage. In

1995, 17.3 percent of the population under 65—more than 40 million

Americans—lacked any health insurance coverage, compared to

11.8 percent in 1980. Similarly, the share of the population under 65

covered by Medicaid grew from an estimated 8.2 percent in 1980 to

12.5 percent in 1995.7

7

The remainder of the nonelderly population was covered by military health care programs

(3.5 percent) or Medicare (1.8 percent). The total of these categories exceeds 100 percent because

some people maintain more than one type of health coverage during a year.

Page 18 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 2 

The Share of the Population Under 65 With

Private Health Insurance Coverage Has

Slowly but Steadily Declined

Private Health

Insurance Coverage

Varies Among States

and Demographic,

Income, and

Employment Groups

The prevalence of private health insurance coverage varies among

segments of the population. For example, people living in southern states,

low-income families, and young adults are less likely to have private health

coverage than the national average. In addition, persons employed by

small firms, part time, and in industries such as construction or agriculture

are less likely to have private health coverage. (App. II presents private

health insurance rates in 1989 and 1995 by state and for several

demographic, employment, and income categories.)

Private health insurance coverage is most common among people living in

the midwestern and northeastern United States and least common among

those in the southwestern and south central United States. (See fig. 2.2.)

For example, only half of the population under 65 in New Mexico had

private health insurance in 1995 compared to 82 percent of the population

under 65 in Connecticut and Minnesota. As shown in figure 2.3, states with

low rates of private health insurance coverage tend to have high uninsured

rates.

Page 19 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 2 

The Share of the Population Under 65 With

Private Health Insurance Coverage Has

Slowly but Steadily Declined

Figure 2.2: Private Health Insurance Coverage by State, 1995

Source: Bureau of the Census, March 1996 Current Population Survey.

Page 20 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 2 

The Share of the Population Under 65 With

Private Health Insurance Coverage Has

Slowly but Steadily Declined

Figure 2.3: Uninsured Rates by State, 1995

Source: Bureau of the Census, March 1996 Current Population Survey.

Private health insurance coverage is particularly low among young adults

aged 18 to 24 (60 percent), blacks (51 percent), and Americans of Hispanic

origin (43 percent). These low levels are reflected in high uninsured rates

among these groups (28 percent, 22 percent, and 35 percent, respectively.)

Page 21 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 2 

The Share of the Population Under 65 With

Private Health Insurance Coverage Has

Slowly but Steadily Declined

In addition, low-income families are much less likely to have private health

insurance than high-income families. Whereas less than one-third of

families with incomes of less than $20,000 had private health insurance in

1995, over 90 percent of families with incomes of at least $60,000 had

private insurance coverage.

Several employment characteristics are important in private health

insurance coverage levels. In 1995, most Americans (64.6 percent)

received private health insurance through employment—either as workers

or as dependents of workers. Workers in small firms are less likely to have

employment-based health insurance than are workers in large firms. For

example, 50 percent of workers in firms with fewer than 10 employees had

private employment-based health insurance in 1995 compared to

82 percent of workers in firms with at least 1,000 employees.8

 Recent

research based on KPMG Peat Marwick and HIAA data for 1989 to 1996

indicates that while more small firms are offering coverage now compared

to the past, a smaller percentage of employees are covered now compared

to 1989.9

Contingent workers, including part-time and temporary workers, are also

less likely to have employer-sponsored coverage. While 79 percent of

full-time, full-year employees had employment-based health insurance in

1995, only 59 percent of employees working part-time or part-year had

employment-based health insurance. Employment-based health insurance

covers less than 60 percent of workers in the agricultural, personal

services, business and repair services, and construction industries but at

least 82 percent of workers in the finance and insurance, mining, and

public administration industries.

Some people who are unable to get health benefits through their

employment purchase private health insurance directly. In a previous

report, we estimated that more than 10 million Americans—4.5 percent of

the nonelderly U.S. population—had individual health insurance as their

only source of health coverage in 1994.10 Individual health insurance is

most common in some Mountain and Plains states and among the

8

For all firm sizes, 72 percent of workers had employment-based health insurance.

9

Analysis completed by Jon Gabel, KPMG Peat Marwick, and Paul Ginsburg, Center for Studying

Health System Change.

10For information on the characteristics of individual insurance enrollees, the structure of the

individual insurance market, and insurance reforms undertaken by states, see Private Health

Insurance: Millions Relying on Individual Market Face Cost and Coverage Trade-offs (GAO/HEHS-97-8,

Nov. 25, 1996).

Page 22 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 2 

The Share of the Population Under 65 With

Private Health Insurance Coverage Has

Slowly but Steadily Declined

self-employed and agricultural workers. Other people who do not have

employment-based coverage and do not qualify for Medicaid may be

unable to purchase individual health insurance because of its cost or a

preexisting medical condition. Some of these people may be able to get

private coverage through a state high-risk pool or other programs, but

others remain uninsured.11

Private Health Coverage

Has Declined Among

Almost All Segments of the

Population

The decline in private health insurance coverage has been nearly universal

in nearly all demographic, income, and employment groups. Between 1989

and 1995, private coverage declined in 43 of 50 states (representing

93 percent of the U.S. nonelderly population) and 10 of 12 industrial

categories (representing 93 percent of all U.S. workers).12 Similarly,

between 1989 and 1995 private health coverage also declined among firms

of all size categories, among both full-time and part-time workers, and

among all income categories.

While declining health insurance has been widespread, coverage has

declined more quickly for some population groups. For children under 18

years old, private health insurance declined by 7 percentage points

between 1989 and 1995 (from 73.1 percent to 66.1 percent) compared to a

4.5 percentage point decline for the nonelderly population overall. If

children’s level of private health insurance coverage had remained at the

1989 level, nearly 5 million more children would have been covered by

private health insurance in 1995.13

The level of private health insurance coverage has also declined more

rapidly among people younger than 65 who are retired (69.0 percent in

1995 compared to 75.9 percent in 1989). This trend reflects the decline in

employers offering retiree health coverage. Foster Higgins reported that

only 40 percent of large employers offered medical coverage to retirees

younger than 65 in 1996 compared to 46 percent in 1993.14

11About 25 states have high-risk pools, covering about 100,000 persons nationwide.

12We are using 1989 as a base for comparison because of difficulties in comparing CPS data for earlier

years, particularly when examining subgroups of the population. For 1989, the Bureau of the Census

released revised estimates (weighted to the 1990 decennial census) that are comparable to the 1995

CPS data on private health insurance coverage. See app. I.

13For information on children’s health insurance coverage, see Health Insurance for Children: Private

Insurance Coverage Continues to Deteriorate (GAO/HEHS-96-129, June 17, 1996) and an update in

Children’s Health Insurance, 1995 (GAO/HEHS-97-68R, Feb. 19, 1997).

14Foster Higgins, National Survey of Employer-Sponsored Health Plans, 1996.

Page 23 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 2 

The Share of the Population Under 65 With

Private Health Insurance Coverage Has

Slowly but Steadily Declined

Private health insurance coverage has also declined more quickly among

near-poor families. While Medicaid is the primary source of insurance

coverage for persons at or below the federal poverty level, private health

insurance covered 55 percent of families between 100 and 200 percent of

the federal poverty level in 1995. This represents a 6 percentage point

decline since 1989. Many of these near-poor families losing private health

coverage gained Medicaid coverage. For some children and pregnant

women in families with incomes between 100 and 200 percent of the

federal poverty level, Medicaid coverage grew from 6.5 percent in 1989 to

11.2 percent in 1995.

Cost Pressures Are

One of Many Factors

Linked to Declining

Employer-Based

Coverage

The decline in private health insurance coverage during the 1980s and the

1990s reflects decisions made by both employers who offer health

insurance and their employees. The long-term growth of health insurance

premiums has made health insurance a more prominent component of

both employer and household budgets. These cost increases contributed

to employer decisions to limit or drop coverage for workers and to

increase the share of insurance costs paid by the worker.

A decline in the number of employers offering health insurance is

prominently cited as a key contributor to declining coverage.15 Particularly

for small employers, costs are cited as a key factor in their decision to

drop coverage for their workers or to consider offering it.16 For those

employing lower-wage workers, health premiums represent a significant

share of total compensation. Even firms that provide coverage for their

workers often exclude part-time or temporary workers—a rapidly growing

component of the labor force.

Not surprisingly, key indicators of the structure of the labor force have

been prominently cited in research that attempts to explain declines in

health coverage. For example, coverage is higher in the Midwest and in

industries with higher wage rates. But recent employment growth has

been concentrated in industries and areas of the country where insurance

coverage has not been as prominent. Several studies suggest that this

change in employment composition was an important factor in recent

declines in coverage.

15Paul Fronstin and Sarah C. Snyder, “An Examination of the Decline in Employment-Based Health

Insurance Between 1988 and 1993,” Inquiry, Vol. 33 (winter 1996-97), pp. 317-25.

16See Access to Health Insurance: State Efforts to Assist Small Business (GAO/HRD-92-90 May 14,

1992), pp. 12-15.

Page 24 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 2 

The Share of the Population Under 65 With

Private Health Insurance Coverage Has

Slowly but Steadily Declined

Table 2.1 summarizes some of the key factors that these studies have

identified as contributing to the decline in private health coverage. While

these studies embrace many of the same variables, their effect is not

always consistent because of differences in modeling, data sources, the

specific population covered, and time periods. There is clearly a complex

interaction among a number of variables affecting costs over time.

However, these studies acknowledge that much of the decline in coverage

remains unexplained by these factors.

Table 2.1: Summary of Studies

Identifying Factors Contributing to

Declining Coverage

Author: period, population

analyzed

Factor contributing to

declining coverage

(percentage accounted for

by factor)

Factor not contributing to

declining coverage

Gregory Acs: 1988-91,

nonelderly population

Family income (67%),

unemployment (15%)

Industry shifts, location, firm

size, demographics

Gregory Acs: 1988-91,

workers

Family income (38%),

industry shifts (17%)

Location, firm size

Kronick: 1979-89, low-income

workers

Industry shifts (not available)

Fronstin and Snider: 1988-93,

workers

Wage rate (23%), industry

shifts (10%), part-time work

(7%), unionization (6%)

Demographics, firm size,

occupation, region

Long and Rodgers: 1980-87;

workers

Industry shifts (<15%) Part-time work

Sources: Gregory Acs, “Explaining Trends in Health Insurance Coverage Between 1988 and

1991,” Inquiry, Vol. 32 (spring 1995), pp. 102-10; Richard Kronick, “Health Insurance, 1979-1989:

The Frayed Connection Between Employment and Insurance,” Inquiry, Vol. 28 (winter 1991), pp.

318-32; Paul Fronstin and Sarah C. Snyder, “An Examination of the Decline in Employment-Based

Health Insurance Between 1988 and 1993,” Inquiry, Vol. 33 (winter 1996-97), pp. 317-25; Stephen

H. Long and Jack Rodgers, “Do Shifts Toward Service Industries, Part-time Work, and

Self-Employment Explain the Rising Uninsured Rate?” Inquiry, Vol. 32 (spring 1995), pp. 111-16.

Moreover, the relative importance of each variable may change over time.

For example, declines in real wages and family income contributed to the

declines in coverage in the 1980s, but whether recent increases in real

wages may have the opposite effect in the next few years is unclear. The

analysis of most of the studies covers a fairly short time period, which may

not reflect many of the potential interactions among these variables. A key

variable like industry mix may have played a more prominent role in the

1980s as service sector employment increased relative to manufacturing,

government, and transportation—industries in which health coverage has

traditionally been more prevalent. But the service industry now represents

a more prominent share of total employment, and some of its recent

growth has been channeled into particular segments like health care or

Page 25 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 2 

The Share of the Population Under 65 With

Private Health Insurance Coverage Has

Slowly but Steadily Declined

computer services, where wage rates are higher and coverage is more

common.

Factors affecting an employer’s decision to offer coverage are important

determinants of the level of coverage. But the growing cost of health

insurance has also affected decisions individuals make. Employees of

firms that offer coverage are being asked to pay a higher share of

premiums. Data from the National Health Interview Survey indicate that

over 62 percent of employed, uninsured family heads report that the main

reason for not being covered is that health insurance is too expensive.17

For those without employer-based coverage, the rise in premiums for

policies purchased in the individual insurance market has been borne

exclusively by those individuals.

Some analysts have also indicated that the expansion in Medicaid

enrollment during the late 1980s and 1990s has “crowded out” private

health insurance coverage—that is, some low-income families who

previously received private coverage are now replacing it with publicly

funded Medicaid. One study concluded that as much as 15 percent of the

decline in private health insurance between 1987 and 1992 could be

attributed to the substitution of Medicaid enrollment.18 However, the

extent to which the Medicaid expansions have caused a decline in private

health insurance coverage rather than absorbed coverage that otherwise

would have been lost remains in dispute.

The erosion of private health insurance coverage for many Americans has

continued through the mid-1990s, a time when health insurance premiums

have been relatively stable and the U.S. economy has been strong, with

low unemployment and steady growth. However, many of the studies

attempting to quantify the reasons for declining private health coverage

use data only through the early 1990s. Researchers have yet to examine

the causes of the decline in coverage over these past few years, taking into

account the more recent economic trends.

17See statement of Patrick J. Purcell, Congressional Research Service, before the U.S. House of

Representatives, Committee on Ways and Means, Subcommitee on Health, April 8, 1997.

18See David M. Cutler and Jonathan Gruber, “Medicaid and Private Insurance: Evidence and

Implications,” Health Affairs, Vol. 16, No. 1 (Jan.-Feb. 1997), pp. 194-200; Lisa Dubay and Genevieve

Kenney, “Did Medicaid Expansions for Pregnant Women Crowd Out Private Coverage?” Health Affairs,

Vol. 16, No. 1 (Jan.-Feb. 1997), pp. 185-93.

Page 26 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 3 

Sharp Increases in Private Health Insurance

Premiums Have Subsided, but the Future

Remains Uncertain

Health insurance premiums for employer-sponsored plans increased

sharply during the late 1980s, but their growth rates have decelerated

substantially in the 1990s, with premium changes reaching record lows in

1996. Studies have attributed the downturn in premium growth to various

factors, including the effects of managed care and cyclical patterns in the

health insurance industry. While some health insurance experts are

identifying signs of future premium increases, it is too early to tell how

much longer premium increases will remain low and how much higher

future growth rates will be. Furthermore, although trend data are not

available for purchasers of individual health insurance, premiums in this

market are very sensitive to the age, gender, and health of enrollees as

well as to state regulation.

Trends in Health

Insurance Premium

Growth Rates During

the 1980s and 1990s

Increases in employer-based health insurance premiums far exceeded the

general price inflation rate in the late 1980s but premium growth rates

have declined in the 1990s. For example, the average annual premium for

employer-based family health insurance coverage increased by

111 percent, from $2,530 to $5,349 between 1988 and 1996, while general

prices rose by 33 percent during this period. Similarly, the average annual

premium for employer-based single coverage increased by 79 percent,

from $1,153 to $2,059 between 1988 and 1996.19

However, the real annual rate of increase in health insurance premiums

has slowed across all employer-based health plan types in the past 7

years.20 As figure 3.1 shows, real premium growth rates of indemnity,

preferred provider organization (PPO), and health maintenance

organization (HMO) plans peaked in 1989 at rates of 15, 13, and 11 percent,

respectively. Real premium growth rates slowed to an average of about

5 percent across all plan types in 1993; over the past 2 years, premiums

experienced near-zero growth. In 1996, premiums increased at lower rates

than the consumer price index and the medical cost index. As figure 3.1

also shows, the differences in premium growth rates among various types

of health plans narrow after 1990. See also table 3.1.

19These average premiums are based on surveys from KPMG Peat Marwick, Survey of Employer

Sponsored Health Benefits, 1996, and Health Insurance Association of America (HIAA), Employee

Survey, 1988.

20“Real premium growth rate” refers to a growth rate that has been adjusted to take into account the

effect of general price inflation.

Page 27 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 3 

Sharp Increases in Private Health Insurance

Premiums Have Subsided, but the Future

Remains Uncertain

Figure 3.1: Real Growth in Premiums by Health Plan Type, 1987-96

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

-5

0

5

10

15

20

Percentage

Indemnity

PPO

HMO

Sources: GAO calculations using data from KPMG Peat Marwick (1991-96); HIAA (1987-90), and

the BLS consumer price index. Includes employer and employee shares of premiums for workers

in private firms with at least 200 employees.

Table 3.1: Real Annual Growth in Premiums Per Health Plan, 1987-96

Plan 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Indemnity –0.2 6.9 15.2 11.6 7.8 8.0 5.5 2.5 –0.1 –1.8

PPO 0.9 12.9 13.2 9.6 5.9 7.6 5.2 0.6 0.7 –2.4

HMO 0.1 4.9 11.2 10.6 7.8 6.8 5.3 2.7 –2.4 –3.4

Sources: GAO calculations based on data from KPMG Peat Marwick (1991-96); HIAA (1987-90),

and BLS consumer price index. Includes employer and employee shares of premiums for workers

in private firms with at least 200 employees.

Page 28 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 3 

Sharp Increases in Private Health Insurance

Premiums Have Subsided, but the Future

Remains Uncertain

Managed Care and

Cyclical Factors in the

Health Insurance

Industry Among Major

Causes of Slowdown

in Premium Growth

Rates

Health insurance researchers attribute the slowdown in annual premium

growth to several causes, including the increased use of managed care and

a downward trend in the health insurance underwriting cycle in which

premiums tend to decline when health insurers’ profits are high. However,

no studies have comprehensively examined the reasons for the recent

7-year decline in premium increases. While the precise effect of managed

care on premiums continues to be debated, some studies contend that

managed care has contributed to the slowdown in premium increases

because HMO plans generally cost less than other health plans and many

managed care organizations control health care use. Hence, the savings

occur from moving consumers from indemnity plans to HMO plans. In

contrast, other research attributes the savings from managed care to

changes in the operation of the health insurance market when managed

care penetration rates reach a critical threshold.

The increased HMO enrollment has contributed to a one-time reduction in

premium levels. KPMG Peat Marwick’s survey found that in 1996 HMO

premiums for employer-sponsored health insurance premiums averaged 6

to 10 percent less than indemnity plan premiums, whereas PPO and

point-of-service (POS) plan premiums were similar to or higher than

indemnity plan premiums. (See table 3.2.) As noted above, however, all

employer-sponsored plan types have had similar growth patterns since

1987, with HMO premium growth rates tending to be slightly lower than

indemnity plan premiums.

Table 3.2: Average Annual Health

Insurance Premiums by

Employer-Sponsored Plan Type, 1996

Single coverage Family coverage

Plan

Average

annual

premium

Percent

different

from

indemnity

Average

annual

premium

Percent

different

from

indemnity

Indemnity $2,090 $5,388

PPO $2,173 +4.0% $5,377 –0.2%

POS $2,058 –1.5 $5,477 +1.7

HMO $1,883 –9.9 $5,071 –5.9

Source: KPMG Peat Marwick Survey of Employer-Sponsored Health Benefits, 1996. This survey

includes employers with at least 200 employees.

Some studies indicate that a fundamental cause of the downturn in

premium increases lies in the nature of the health insurance underwriting

Page 29 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 3 

Sharp Increases in Private Health Insurance

Premiums Have Subsided, but the Future

Remains Uncertain

cycle.21 Health insurer’s profits and premiums are inversely related. Health

insurance researchers have found that historically health insurance

premiums have increased about 2 years after health insurers’ profits

declined and vice versa. Industry profits were high from 1993 to 1995,

which suggests that low premium increases for 1996 were predictable. As

shown in figure 3.2, 1974 and 1980 were other periods of near-zero real

premium growth. Our review showed that the 7-year downward trend in

premium growth rates since 1989 is the longest period of declining rates of

growth in private health insurance premiums over the past two decades.

(Fig. 3.2 shows changes in enrollee spending in private health insurance

from 1970 to 1995.)

Figure 3.2: Change in Private Health Insurance Real Spending Per Enrollee, 1970-95

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994

-5

0

5

10

15

20

10.6 11

-0.8

17.7

-0.3

2.1

10.3

5.2

7.2

-1.1

Percentage

8.4

Source: HCFA Office of Actuary and BLS, Consumer Price Index.

21See Gail A. Jensen and others, “The New Dominance of Managed Care: Insurance Trends in the

1990s,” Health Affairs, Vol. 16, No. 1 (Jan.-Feb. 1997), and Jon Gabel and others, “Tracing the Cycle of

Health Insurance,” Health Affairs (winter 1991).

Page 30 GAO/HEHS-97-122 Private Health Insurance Trends
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Sharp Increases in Private Health Insurance

Premiums Have Subsided, but the Future

Remains Uncertain

Some analysts also attribute part of the duration of this downward trend

to market responses to the comprehensive federal health care reforms

proposed during the early 1990s and to increased competition among

health plans trying to build market share through favorable pricing. In

addition, the private health insurance industry has been undergoing

consolidation and mergers.22 However, there is limited research on the

effects of these mergers, and it is too early to determine their effect on

health insurance premiums.

It is difficult to tell whether the low premium growth rates of the past 2

years are temporary or a signal of price stability in the private health

insurance market. Nonetheless, some health researchers are beginning to

identify signs of possible premium increases in the next few years. For

example, according to Foster Higgins’ 1996 National Survey of

Employer-Sponsored Health Plans, premiums may increase because

(1) many HMOs have raised their rates for 1997 following sagging profits in

1996, (2) health care providers are consolidating and gaining more

bargaining clout with managed care plans, (3) state and federal laws are

requiring health insurance plans to expand the benefits covered, and

(4) there is little room for additional savings in costs from shifting

employees to managed care plans, since more than three-fourths of active

employees are already in managed care plans. In addition, with low

unemployment, the prospects of a tight labor market could reverse the

low, overall inflation rate of the past years.

Premiums for

Individual Health

Insurance Vary With

Demographic Traits,

Health Status, and

State Regulation

In most states, premiums for health coverage purchased in the individual

health insurance market primarily reflect the demographic characteristics

and health status of each applicant, unlike employer-based health

insurance premiums, which reflect the average risk characteristics of the

entire insured group. Premium rates in the individual market vary

substantially among states and carriers, affecting individual consumers

differently, depending on their particular circumstances.23 The

demographic characteristics that carriers often considered in setting

premium prices in the individual insurance market include age, gender,

geographic area, and family composition. For example, a plan in Arizona

22See Roger Feldman, Douglas Wholey, and Jon Christianson, “Economic and Organizational

Determinants of HMO Mergers and Failures,” Inquiry, Vol. 23 (summer 1996), pp. 118-32. This study

discusses the implications of HMO mergers on premiums and the effects of mergers, depending on the

competitive nature of the HMO markets.

23For details on premium price variation stemming from demographic characteristics and health

status, see Private Health Insurance: Millions Relying on Individual Market Face Cost and Coverage

Trade-Offs (GAO/HEHS-97-8, Nov. 25, 1996).

Page 31 GAO/HEHS-97-122 Private Health Insurance Trends
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Sharp Increases in Private Health Insurance

Premiums Have Subsided, but the Future

Remains Uncertain

charges a healthy 55-year-old man more than three times the rate for a

healthy 25-year-old man for the same coverage ($191 versus $57 per

month). In addition, people with a preexisting condition, such as knee

injuries or diabetes, would not be able to purchase this plan or would have

an exclusion for that condition.24

State regulation has also affected premium prices in the individual market.

Some states, including New Jersey, New York, and Vermont, have enacted

legislation requiring community rating. Under pure community rating, the

cost of insurance is spread equally among all community members,

regardless of demographic characteristics and health status.25 Although

prices range widely depending on the plan, all applicants are eligible for

and may select from among any of the plans that carriers provide. For

example, in New Jersey, the monthly premium price for a fee-for-service

plan ranges from $155 to $565.

24Effective July 1, 1997, HIPAA allows people with continuous group coverage to purchase individual

coverage without meeting preexisting condition exclusions. Some states have indicated that they may

develop alternative mechanisms to provide access to coverage for people with preexisting conditions

when they lose coverage, such as high-risk pools.

25Some states that have enacted community rating, such as New York, allow for limited adjustments by

geographic regions; some also allow adjustments for age or gender.

Page 32 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 4 

Employers’ Efforts to Control Costs Have

Changed the Nature of Private Health

Insurance

The increasing costs of providing health benefits to employees during the

1980s and 1990s have stimulated employers to become increasingly

aggressive in attempting to control their costs. Between 1980 and 1996, the

costs of providing private health coverage to employees increased from

3.4 percent of total compensation to 5.6 percent.26 (See fig. 4.1.) Many of

the changes in employment-based health coverage over the past two

decades—notably requiring employees to pay a greater share of premium

costs, encouraging enrollment in network-based managed care plans, and

self-funding health benefits—have fundamentally changed the nature of

private health insurance coverage for employees.

Figure 4.1: Employer Private Health

Insurance Spending as a Percentage

of Total Compensation, 1980-94

1980 1985 1990 1994

0

2

4

6

8

3.4

4.1

5.2

5.6

Percentage

Source: HCFA, Office of the Actuary.

26Total business health costs, including private health insurance premiums as well as workers

compensation costs, payments to the Medicare Hospital Insurance Trust Fund, and on-site health

services rose, from 4.7 percent of total compensation in 1980 to 7.5 percent of total compensation in

1994.

Page 33 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 4 

Employers’ Efforts to Control Costs Have

Changed the Nature of Private Health

Insurance

Employees Are

Required to Pay an

Increasing Share of

Premiums for Their

Coverage

As private health insurance costs increased rapidly during the late 1980s

and early 1990s, employers required their employees to pay an increasing

share of the premiums for employment-based health insurance. On the

average, employees paid about 30 percent of the premium for family

coverage and 22 percent of the premium for single coverage in 1996. In

comparison, in 1988 employees paid 26 percent of family plan premiums

and 10 percent of single plan premiums. (See fig. 4.2.)

Figure 4.2: Employee Share of

Premiums, 1988-96

1988 1989 1990 1991 1992 1993 1994 1995 1996

5

10

15

20

25

30

35

Percentage

Family Coverage

Single Coverage

Sources: KPMG Peat Marwick, 1991-96; HIAA, 1988-90.

The increasing share of premiums paid by employees represents a trend

away from employers paying the entire premium for employees’ coverage.

BLS reports that health benefits paid entirely by the employer for single

coverage were available to 72 percent of employees in 1980. By 1993, only

half as many employees (37 percent) had single coverage available at no

cost from their employer. For family coverage, employees with health

Page 34 GAO/HEHS-97-122 Private Health Insurance Trends
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Employers’ Efforts to Control Costs Have

Changed the Nature of Private Health

Insurance

benefits paid entirely by the employer fell from 51 percent in 1980 to

21 percent in 1993.27

While the share of premiums paid by the employee has grown more for

single coverage than for family coverage, family plan premiums have

grown more quickly than single plan premiums. As noted in chapter 3,

premiums for family coverage increased 111 percent compared to

79 percent for single coverage between 1988 and 1996. In addition,

employers have increasingly adopted tier-rating practices that charge

employees different rates, depending on the number of people covered in

their family. As a result, employees have had to pay more for dependent

coverage, particularly if they are covering several dependents.28 To some

extent, this higher cost for dependent coverage has contributed to the

more rapid decline in private health insurance coverage for children.

While employees have paid an increasing share of premiums, their

out-of-pocket costs for coinsurance and deductibles have not changed

much. According to the BLS survey, the median deductible for single

coverage in non-HMO plans offered by medium and large employers was

$200 in 1993.29 Deductibles for family coverage are generally two or three

times deductibles for single coverage. Most health plan participants in

medium and large firms had a $100 deductible in 1980, which would have

been $175 in real 1993 dollars.30 Similarly, the most common coinsurance

rate has remained at 80 percent.

Cost sharing arrangements vary by plan type. HMOs generally do not

require a deductible or coinsurance, instead charging a copayment such as

$10 per visit. PPOs and POS plans typically vary the coinsurance rates,

depending on whether the patient visits a provider within or outside their

network. For example, KPMG Peat Marwick reports that in 1996 most PPOs

27See Bureau of Labor Statistics, Employee Benefits in Medium and Large Private Establishments, 1993

(Washington, D.C.: Nov. 1994), and Employee Benefits in Medium and Large Firms, 1988 (Washington,

D.C.: Aug. 1989).

28For a detailed discussion of changes in dependent coverage, see Employment-Based Health

Insurance: Costs Increase and Family Coverage Declines (GAO/HEHS-97-35, Feb. 24, 1997).

29In contrast, in the individual insurance market there tends to be a wider range of deductible levels,

with deductibles commonly between $250 and $2,500. In a previous report, we found that for one

insurer an individual health plan with a $2,000 deductible was nearly half the cost of a similar plan with

a $250 deductible ($565 versus $1,073) for a healthy 30-year-old man.

30Smaller firms tend to have higher deductibles. The 1993 Robert Wood Johnson Foundation Employer

Health Insurance Survey found that the average annual deductible was $408 for firms with 1 to 4

employees compared to $202 for firms with 50 or more employees.

Page 35 GAO/HEHS-97-122 Private Health Insurance Trends
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Employers’ Efforts to Control Costs Have

Changed the Nature of Private Health

Insurance

paid 80 or 90 percent for preferred providers, whereas they paid 70 or

80 percent for nonpreferred providers.

Network-Based

Health Plans Have

Become Prevalent,

but Wide Variation in

Plan Types Remain

Health plans available in the private market continue to evolve, with

greater reliance on management of care and medical services provided

through a defined network of physicians and hospitals. Most insured

Americans under 65—over 100 million people—are enrolled in a

network-based health plan that requires or encourages them to use

hospitals and physicians affiliated with the plan. This is a fundamental

change from 1980, when nearly all privately insured Americans were

enrolled in traditional indemnity plans without restrictions or incentives to

use particular providers. However, even with the rapid growth of

network-based health plans, most people have enrolled in plans that retain

their ability to receive medical care from physicians not affiliated with the

plan at a higher cost to the patient.

Network-based health plans have often been categorized as “managed

care,” but the methods they use vary widely and so does the extent to

which they manage enrollees’ use of health care services. Examples of

these plans include group and staff model HMOs, independent practice

association (IPA) HMOs, PPOs, and POS plans. These plans vary as to whether

enrollees can use health care providers other than those affiliated with the

plans’ network of providers, the breadth of the network relative to the

number of enrollees, and how physicians and hospitals are reimbursed for

serving the plans’ enrollees. Table 4.1 summarizes variation among the

different types of network-based health plans according to these

characteristics.

Page 36 GAO/HEHS-97-122 Private Health Insurance Trends
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Employers’ Efforts to Control Costs Have

Changed the Nature of Private Health

Insurance

Table 4.1: Characteristics of Health

Insurance Plans Plan Choice of provider Size of network Provider payments

Traditional

indemnity

Unlimited No network Fee-for-service

PPO Financial

incentives to use

preferred providers

Narrow to broad

network

In-network physicians,

discounted

fee-for-service;

out-of-network

physicians,

fee-for-service

POS Financial

incentives to use

preferred

providers; may

have primary care

gatekeeper

Narrow to broad

network

In-network physicians,

discounted

fee-for-service or

capitation;

out-of-network

physicians,

fee-for-service

IPA HMO Restricted to

network providers;

generally includes

primary care

gatekeeper

Narrow to broad

network

Capitation or

fee-for-service, may

include withholds or

bonuses

Group and staff

HMO

Restricted to

network providers;

primary care

gatekeeper

Narrow network Capitation or salary

The most tightly managed plans are traditional group and staff HMOs;

enrollment in these types of plans has fallen since 1989. (See fig. 4.3 and

table 4.2.) These HMOs contract with physicians who generally serve the

plan’s enrollees exclusively and are paid either a per member, per month

payment (capitation) or salary. Enrollees are restricted to the providers

affiliated with the plan and pay only a small copayment, such as $10, per

visit. Generally enrollees are assigned a primary care physician, sometimes

called a “gatekeeper,” who coordinates their care and approves the use of

specialist services.

Page 37 GAO/HEHS-97-122 Private Health Insurance Trends
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Employers’ Efforts to Control Costs Have

Changed the Nature of Private Health

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Figure 4.3: Enrollment in Network-Based Health Plans by Type, 1980-95

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

0

20

40

60

80

100

120

Enrollment (in Millions)

Group/Staff HMO

IPA/Network/Mixed HMO

PPO

POS

Sources: HMO enrollment from Interstudy and includes Medicare and Medicaid. PPO and POS

enrollment GAO estimate based on data from KPMG Peat Marwick.

Page 38 GAO/HEHS-97-122 Private Health Insurance Trends
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Employers’ Efforts to Control Costs Have

Changed the Nature of Private Health

Insurance

Table 4.2: Enrollment in

Network-Based Health Plans by Type,

1980-95

Group/Staff

HMO

IPA/network/

mixed HMO PPO POS

1980 7.4 1.7 0.0 0.0

1981 7.8 2.4 0.0 0.0

1982 7.6 3.3 0.0 0.0

1983 8.4 4.1 0.0 0.0

1984 8.7 6.4 1.3 0.0

1985 9.2 9.7 5.8 0.0

1986 10.2 13.5 16.5 0.0

1987 10.4 18.2 17.9 0.0

1988 12.3 19.1 17.5 0.0

1989 13.2 19.3 28.0 0.0

1990 13.1 20.6 20.0 7.7

1991 12.9 22.2 28.9 4.1

1992 11.9 25.3 39.4 12.1

1993 11.7 28.1 30.4 13.8

1994 10.8 31.5 37.2 22.3

1995 9.9 36.3 30.2 24.7

Sources: HMO enrollment data are from Interstudy and includes Medicare and Medicaid. PPO

and POS enrollment numbers are GAO estimates based on data from KPMG Peat Marwick.

Most Americans with private health insurance are enrolled in one of a

variety of newer network-based health plans that incorporate some of the

elements of both the traditional group and staff HMOs as well as

unrestricted fee-for-service plans. These plans, including IPA HMOs, PPOs,

and POS plans, were nearly nonexistent in 1980. Nearly all the growth in

HMO enrollment since 1980 has occurred in IPA and similar HMOs rather than

group and staff HMOs. As with group and staff model HMOs, IPA HMO

enrollees receive coverage only for medical services provided by providers

affiliated with the HMO. However, the plan contracts with physicians in

different practice settings who generally serve patients from other health

plans as well as the contracting HMO. Furthermore, physicians contracting

with IPA HMOs are less likely to be reimbursed through capitation or salary;

often, these physicians receive a fee-for-service payment with financial

incentives to control use.31

31Some former staff and group model HMOs have expanded by incorporating IPA contracts with

physicians. These are generally categorized as mixed-model HMOs.

Page 39 GAO/HEHS-97-122 Private Health Insurance Trends
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Employers’ Efforts to Control Costs Have

Changed the Nature of Private Health

Insurance

The most common types of network-based health plans, enrolling at least

55 million Americans, are PPOs and POS plans.32 These plans encourage

enrollees to seek care from physicians affiliated with the plan but allow

enrollees to receive care from physicians outside the plan’s network at a

higher out-of-pocket cost to the patient. Thus, they provide enrollees with

more options in choosing a provider but are less able to manage the

enrollees’ use of health services. PPOs generally resemble traditional

indemnity plans, except that they give financial incentives for enrollees to

use physicians who have agreed to accept discounted fee-for-service

payments and other standards established by the plan. Often, POS plans

developed from HMOs but allow enrollees to choose a physician outside the

panel of HMO physicians at greater expense to the enrollee. Increasingly,

however, the distinction between plan types has become blurred. Thus,

some PPOs may have greater use controls than some IPA HMOs.33

Employers Have

Increasingly

Self-Funded Their

Health Benefits

Increasingly, employers have assumed greater direct control over their

health benefits by self-funding their plans, paying the cost of health claims

directly from their revenues rather than contracting with an insurer to

assume the risk. Many employers moderate the level of the risk that they

are self-funding by purchasing stop-loss coverage to insure against health

costs that exceed a set threshold. In addition, many contract with a

third-party administrator to handle claims payments, benefit design, and

other administrative tasks traditionally performed by an insurance

company.

Employers decide to self-fund their health plans for several reasons, but a

significant advantage to employers results from the fact that states cannot

apply their insurance requirements to self-funded health plans. ERISA

preempts states from directly regulating employer pension and welfare

benefit plans, including health benefit plans. However, ERISA allows states

to continue their traditional role in regulating the terms and conditions of

insurance.34 Thus, states require insurers to pay premium taxes, offer

specific benefits, meet solvency standards, and use specific practices for

32This may underestimate PPO and POS plan enrollment. The American Association of Health Plans

(AAHP) reports that by year-end 1995 HMOs enrolled 58.2 million people (including 10.8 million in

HMOs with POS options) and PPOs enrolled 91 million people. However, the AAHP survey may double

count some PPO enrollees. See app. I for a discussion of our methods in estimating enrollment in the

different network-based health plans.

33For information on how managed care attempts to control the use of health services, see Managed

Health Care: Effect on Employers’ Costs Difficult to Measure (GAO/HRD-94-3, Oct. 19, 1993).

34For information on ERISA and its implications for health plans, see Employer-Based Health Plans:

Issues, Trends, and Challenges Posed by ERISA (GAO/HEHS-95-167, July 25, 1995).

Page 40 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 4 

Employers’ Efforts to Control Costs Have

Changed the Nature of Private Health

Insurance

setting premium prices, but self-funded health plans are preempted from

these state requirements.

This exemption from state regulation allows employers who self-fund their

health plans to save costs associated with state regulation and to offer a

uniform, interstate health plan. In an earlier report, we examined the cost

differences to self-funded and fully insured health plans resulting from

these state requirements.35 We found that the extent to which these

requirements increased the costs of insured health plans compared with

self-funded health plans varies by state. On the average, premium taxes

increased costs to commercial health insurers by about 2 percent.

Although studies of the claims costs associated with state-mandated

benefits range from 5 to 22 percent, most self-funded plans offer many of

the benefits that are mandated by states. As a result, the additional costs

to most self-funded plans, if they were required to comply with

state-mandated benefits, would not be as high as these studies estimate. In

addition, most insurers voluntarily exceed states’ minimum financial

solvency standards, indicating that these standards have a limited

potential effect on their costs.

The share of insured workers who get their health coverage through

self-funded plans has grown. As shown in figure 4.4, this share has tripled

since 1980 for workers and dependents in medium and large private

establishments (from 15 percent in 1980 to 46 percent in 1993). Data on

self-funding among smaller firms are more limited. BLS reports that

31 percent of participants in establishments with fewer than 100

employees self-funded their health plans in 1992. However, this overstates

the extent of self-funding among small employers because some

self-funded larger employers may have multiple establishments that are

included in the survey. Another 1993 survey, by the Robert Wood Johnson

Foundation in 10 states, found that only 6 to 10 percent of establishments

with fewer than 50 employees self-funded their health plans.

35For a detailed discussion of the costs associated with these and other state insurance requirements,

see Health Insurance Regulation: Varying State Requirements Affect Cost of Insurance

(GAO/HEHS-96-161, Aug. 19, 1996.)

Page 41 GAO/HEHS-97-122 Private Health Insurance Trends
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Employers’ Efforts to Control Costs Have

Changed the Nature of Private Health

Insurance

Figure 4.4: Growing Share of Insured Workers and Dependents in Self-Funded Health Plans, 1980-93

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

0

10

20

30

40

50

Percentage of Participants

Note: Includes firms with at least 100 employees 1988-93 and at least 50, 100, or 250 employees

depending on industry 1980-86.

Source: BLS Employee Benefit Surveys, 1980-93.

The growth of self-funding has occurred primarily among indemnity and

PPO plans, but some employers are beginning to develop arrangements in

which they self-fund their HMO plans as well. In general, large employers

have self-funded their indemnity plans and contracted with HMOs as fully

insured products that are subject to state insurance requirements.

However, KPMG Peat Marwick’s survey indicates that as much as

20 percent of HMO enrollment may be in self-funded arrangements. In

addition, AAHP, an association that represents HMOs, reports that more than

half of HMOs offered self-insured products to employers in 1995.

Page 42 GAO/HEHS-97-122 Private Health Insurance Trends
Chapter 5 

Concluding Observations

Although private health insurance premiums have stabilized in recent

years, the share of Americans covered by private health insurance

continues to gradually decline. This trend has persisted despite growth in

employment since 1992. Rising costs and declining coverage have

contributed to fundamental changes in many Americans’ health coverage.

More people have Medicaid coverage or are uninsured. Those with private

coverage often have to pay a greater share of a plan’s premiums and are

more likely to be in a health plan that manages their use of health services.

Although it is difficult to predict trends, at some point costs are likely to

start rising again. Many of the underlying causes of rising health care

costs, such as an aging society and new medical technologies, remain.

Furthermore, many of the easily obtained savings from switching to

managed care plans may have been achieved. If health insurance costs

increase, employers and insurers will have greater pressure to continue

pursuing stronger cost control methods. Thus, employees may continue to

be required to pay more for health coverage, employers will likely

encourage enrollment in tighter forms of managed care, and some

employers may even stop offering health benefits.

Public demand for federal and state reforms to address the affordability of

and access to private health coverage may increase if private health

coverage continues to erode. Federal legislation, the Health Insurance

Portability and Accountability Act, has expanded the federal role in

regulating private health insurance. Future attention may focus on groups

that have been most likely to lose private coverage—children, early

retirees, and near-poor families. In addition, the public sector may be

called upon to react to changes in the private sector, such as by examining

managed care practices and the consequences of increased self-funding of

health benefits by employers.

Page 43 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix I 

Major Data Sources and Methodology for

GAO Estimates

There is no single, comprehensive source of data on private health

insurance. Instead, a variety of surveys provide information based on

samples of people receiving private health insurance, employers offering

health insurance, or health plans providing health coverage. Each survey

samples different populations, focuses on different questions, and uses

different methodologies. In addition, few data sources have consistently

used a comparable methodology over a long period of time, often requiring

that long-term trends be identified from a variety of data sources or

adjusting the data to make them more comparable. This appendix briefly

describes the major data sources used for this report and the methodology

we used when major adjustments were necessary to make estimates for

trends in private health insurance.

Data on Health

Insurance Coverage

From the Bureau of

the Census’ Current

Population Survey

The Current Population Survey (CPS) provides data on the source of health

insurance coverage, or lack thereof, for the civilian noninstitutional

population of the United States. The March 1996 CPS surveyed 48,000

households with over 136,000 individuals and asked about health

insurance coverage during the previous year. Thus, the March 1996 CPS

asks about health coverage in 1995.36

The CPS contains data on health insurance coverage for the period 1979 to

1996, but several methodological changes make it difficult to compare the

data. These include changes in the questions asked, the way in which

responses are weighted to be nationally representative, and the method of

interviewing and processing data. While some of these changes have had

only minor effects on the comparability of the data, in other cases we have

adjusted the data reported by the CPS to make them more comparable with

more recent years.

The most significant revisions occurred in March 1988 when the questions

regarding private health insurance coverage and children’s health

coverage were changed. In particular, these revisions resulted in the

identification of many children as having health insurance who would

have previously been identified as being uninsured. Following this change

in the CPS questions, the CPS reported a drop in the number of uninsured

persons from 37.4 million in 1986 to 31.0 million in 1987 while private

health insurance coverage went from 170.4 million to 182.2 million. Census

notes that “most of the difference was a result of changes to the health

insurance questions” rather than an actual decline in the number of

36Some experts, however, believe that most respondents provide information on their health coverage

at the time of the survey—that is, March 1996.

Page 44 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix I 

Major Data Sources and Methodology for

GAO Estimates

uninsured. Therefore, we adjusted the CPS data prior to 1987 to make them

more comparable with data since 1987. Specifically, we assumed that the

rate of change in coverage between 1986 and 1987 was the average rate of

change for the 2 years before and after 1986-87. In effect, this increases the

share of the nonelderly population with private health insurance as

reported by CPS prior to 1987 by about 3.6 percentage points.

Another redesign of the CPS private health insurance questions occurred in

March 1995. Census representatives report that this change affects the

distribution of respondents with “employment-based” coverage and “other

private” coverage, but the number of people with private insurance

broadly (combining both “employment-based” and “other private”

coverage) is not significantly affected. For this reason, this report

discusses the combined “private health coverage” rather than

“employment-based” coverage when comparing trends from the CPS before

and after 1994.37

We made a minor adjustment to the CPS data prior to 1992 to reflect

changes in the data resulting from the way Census weights CPS responses

to be nationally representative. As reported by Census, data prior to 1992

were weighted based on the 1980 decennial census, whereas since 1992

data have been weighted based on the 1990 decennial census. Census has

reported data from the March 1990 and March 1993 CPS with both the 1990

and 1980 weights. Comparing data for 1989 and 1992 with both sets of

weights, we calculate that the change in weights resulted in a shift in

private health insurance coverage rates of about –0.5 percentage points.38

To avoid having a one-time shift in coverage rates resulting from the

change in weights, we adjusted the CPS data to spread the effect of the

weighing change over multiple years. Specifically, we revised the data

from earlier CPS years by a graduated proportion of this difference

resulting from the weights. That is, the March 1989 CPS data are decreased

by an amount equal to 90 percent of the effect attributed to changing the

weights (90 percent of –0.5 percentage points for private health insurance

coverage), whereas the March 1981 CPS is decreased only by 10 percent of

the effect attributed to changing the weights. Data from the March 1991

and March 1992 CPS were adjusted for the full effect of the change in

weights (–0.5 percentage points for private health insurance).

37Other revisions in the CPS since 1979 include changes in how responses are weighted to be nationally

represented and a shift from paper and pencil to computer-assisted telephone interviews.

38In addition, Census has provided revised weights for the March 1990 CPS. For this reason, we use the

March 1990 CPS as our base in comparing changes in health coverage among segments of the

population.

Page 45 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix I 

Major Data Sources and Methodology for

GAO Estimates

Table I.1 presents the unadjusted CPS data on private health insurance as

reported by Census and our estimates based on the adjustments discussed

above; figure I.1 shows our estimates of health coverage resulting from

these adjustments.

Table I.1: GAO Estimates of Private

Health Coverage Based on the Current

Population Survey, 1979-95

Unadjusted

private health

coverage

Adjusted private

health coveragea

Net effect of

adjustment

1979 76.4% 80.0% 3.6

1980 n/a 79.5b n/a

1981 75.5 78.9 3.5

1982 74.4 77.8 3.4

1983 73.1 76.5 3.4

1984 72.5 75.8 3.3

1985 72.5 75.8 3.3

1986 72.7 75.9 3.2

1987 76.2 75.8 –0.5

1988 75.5 75.1 –0.5

1989 75.5,c 75.0d 75.0 –0.5

1990 73.8 73.3 –0.5

1991 72.7 72.2 –0.5

1992 71.6c 71.0d 71.0 –0.5

1993 70.8 70.8

1994 70.6 70.6

1995 70.5 70.5

Note: “n/a” is not available.

aCPS data adjusted to make trends in coverage more comparable as a result of (1) a change in

survey questions in the March 1988 CPS and (2) changes in weights in the March 1993 survey.

bThe 1981 CPS did not ask about nongroup private health insurance coverage for 1980. We

estimated 1980 private health insurance coverage as the average for 1979 and 1981.

c1980 weights.

d1990 weights.

Page 46 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix I 

Major Data Sources and Methodology for

GAO Estimates

Figure I.1: Estimate of Private Health Coverage, Population Under Age 65, 1979-95

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

0

20

40

60

80

Percentage

Private

Uninsured

Source: GAO estimate based on Bureau of the Census data.

We used the March 1990 CPS (1989 data) and the March 1996 CPS (1995

data) to assess how private health insurance coverage has changed among

subgroups of the U.S. population because the data from the two years are

comparable without making any adjustments. In particular, Census

provided revised weights for the March 1990 CPS to reflect the 1990

decennial census. This is the same weighing method used in making the

March 1996 CPS nationally representative. Therefore, we were able to

compare changes in private coverage between 1989 and 1995 without any

artificial data distortions resulting from changes in the CPS weighing

methods.

Page 47 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix I 

Major Data Sources and Methodology for

GAO Estimates

Health Spending Data

From the Health Care

Financing

Administration

The Health Care Financing Administration (HCFA) reports data on national

health care expenditures.39 These national health expenditure accounts

include data by spending type (for example, hospital, physician, and

pharmaceutical), as well as funding sources such as businesses,

households, and government. In this report, we report on total national

health care expenditures and spending for private health insurance.

National health care expenditures include all spending for personal health

care services and supplies—including hospitals, physicians, home health,

pharmaceuticals, nursing facilities, and other services and supplies—as

well as spending associated with health research and construction. Private

health insurance expenditures include payments by private insurers to

health care providers as well as the net costs of administration and profits.

The premiums paid to private health insurers are divided into payments by

businesses, households, and governments.

Employer Health

Benefit Surveys

Several organizations conduct nationally representative surveys based on

random samples of employer health plans. In general, these surveys ask

employers about the types of health plans provided to employees,

premiums paid, and features of the benefit design. Key features of the

employer surveys used in this report are summarized below.40

BLS Employee Benefit

Surveys

The Bureau of Labor Statistics (BLS) annually surveys a nationally

representative sample of employers regarding their employee benefit

plans, including health benefits. Between 1979 and 1986, BLS conducted

employee benefit surveys of full-time employees in medium and large

establishments, defined then as having at least 100, or 250 or more,

employees, depending on industry. In 1988 and in odd-numbered years

since 1989, BLS has surveyed medium and large private establishments,

currently defined as employing at least 100 workers. BLS has surveyed

small private establishments (employing fewer than 100 workers) and

state and local governments during even-numbered years since 1990.41 The

1993 medium and large employer survey included 2,325 responding

39See Katharine R. Levit and others, “National Health Expenditures, 1995,” Health Care Financing

Review, Vol. 18, No. 1 (fall 1996), pp. 175-214, and Cathy A. Cowan and others, “Business, Households,

and Government: Health Spending, 1994,” Health Care Financing Review, Vol. 17, No. 4 (summer 1996),

pp. 157-78.

40For a detailed summary of various surveys of employer health plans, see Pamela Farley Short, Data

Sources for Studies of Self-Insured Health Plans (Washington, D.C.: RAND, Nov. 1995).

41See BLS, Employee Benefits in Medium and Large Private Establishments, 1993 (Washington, D.C.:

Nov. 1994); Employee Benefits in Small Private Establishments, 1994 (April 1996); and Employee

Benefits in State and Local Governments, 1994 (1996).

Page 48 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix I 

Major Data Sources and Methodology for

GAO Estimates

establishments; the 1994 small employer survey included 2,135 responding

establishments.

KPMG Peat Marwick’s

Survey of

Employer-Sponsored

Health Benefits

Since 1991, KPMG Peat Marwick has annually surveyed a nationally

representative sample of private and public employers with 200 or more

workers regarding the health benefits provided to their employees.42

Because the KPMG survey questions are similar to employer surveys

conducted by the Health Insurance Association of America (HIAA) from

1987 to 1993, we use data from both the HIAA and KPMG surveys to report

on trends in private health insurance since 1987. Although the KPMG

annual survey is limited to employers with at least 200 employees, KPMG

and Wayne State University conducted similar surveys of employers with

fewer than 200 employees in 1993, 1995, and 1996. We combined

information from these surveys to provide data for employers of all sizes.43

Foster Higgins Foster Higgins also conducts an annual survey on health benefits offered

by private employers.44 Since 1993, the survey has been based on a random

sample of employers with at least 10 employees. Between 1986 and 1992,

the survey was not randomly selected and focused on large employers

(typically with at least 500 employees).

Robert Wood Johnson

Foundation

In 1993, the Robert Wood Johnson Foundation commissioned a survey of

2,000 employers regarding their health benefits in 10 states: Colorado,

Florida, Minnesota, New Mexico, New York, North Dakota, Oklahoma,

Oregon, Vermont, and Washington.45 According to this study, the survey,

which included firms of all sizes, generally reflected the national pattern of

employers health benefits.

42In 1996, the KPMG survey included 1,151 firms. See KPMG Peat Marwick, Health Benefits in 1996

(Tysons Corner, Va., and San Francisco, Calif.: Oct. 1996).

43See Gail Jensen and others, “The New Dimension of Managed Care Insurance Trends in the 1990s,”

Health Affairs, Vol. 16, No. 1 (Jan.-Feb. 1997).

44See Foster Higgins, National Survey of Employer-sponsored Health Plans (1996).

45See Joel C. Cantor, Stephen H. Long, and M. Susan Marquis, “Private Employment-Based Health

Insurance in Ten States,” Health Affairs (summer 1995), pp. 199-211.

Page 49 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix I 

Major Data Sources and Methodology for

GAO Estimates

GAO Estimates of

Managed Care

Enrollment

We estimated enrollment in managed care health plans using several

sources. We used data from Interstudy’s annual survey of U.S. health

maintenance organizations (HMO) for HMO enrollment since 1980.46 We

estimated enrollment in preferred provider organizations (PPO) and

point-of-service (POS) plans since 1987 using data from the KPMG Peat

Marwick and HIAA survey discussed above. The KPMG-HIAA survey

provides the distribution of enrollment in the various health plan types for

employees in firms with at least 200 employees. We multiply the ratio of

PPO and POS enrollees to HMO enrollees to the number of private HMO

enrollees (not including Medicaid and Medicare enrollment) to estimate

the number of enrollees in PPO and POS plans.

Our method may underestimate PPO and POS plan enrollment if the ratio of

PPO and POS enrollees to HMO enrollees is higher in smaller firms (those

with fewer than 200 employees). Although smaller firms are in general less

likely to use managed care, this fact does not affect our estimates of

managed care enrollment. However, if smaller firms tend to have more

enrollment in PPO and POS plans than in HMO plans relative to larger firms,

then we may underestimate PPO and POS enrollment. According to the 1995

survey of firms of all sizes conducted by KPMG and Wayne State

University, the ratio of PPO and POS to HMO enrollment is somewhat greater

if small firms are included. If we had used this ratio of all firm sizes rather

than the ratio for firms with more than 200 employees, our estimate of PPO

and POS enrollment would have been 10.4 million higher (65.3 million

rather than 54.9 million). However, comparable data on managed care

enrollment among smaller firms are not available for earlier years.

The American Association of Health Plans (AAHP) reports that 58.2 million

people were enrolled in HMOs by October 1, 1995, including 10.8 million in

HMOs with a POS option. Thus, if HMO enrollees with a POS option are

excluded, the 1995 AAHP survey reports a similar number of Americans

enrolled in an HMO plan (47.4 million) as the 1995 Interstudy survey

(46.2 million).

The AAHP survey finds that 1995 enrollment in PPO plans is much higher

(91.0 million) than our estimate (54.9 million, including POS enrollment).

However, AAHP’s survey may double count some PPO enrollment. Thus,

while our method may underestimate PPO and POS enrollment, the AAHP

survey may overestimate PPO enrollment. In addition, AAHP reports on PPO

enrollment only since 1992. In order to be able to report on managed care

46See Interstudy Publications, The InterStudy Competitive Edge: HMO Industry Report 6.2

(Minneapolis: 1996).

Page 50 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix I 

Major Data Sources and Methodology for

GAO Estimates

enrollment since 1980, we used a consistent method to estimate PPO

enrollment since 1987. We used data from HIAA to estimate PPO enrollment

between 1984 and 1986. Prior to 1984, fewer than 1 million Americans

were enrolled in PPOs.

Page 51 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix II 

Private Health Insurance Coverage Within

Population Categories, 1989 and 1995

Table II.1: Share of Population Under

Age 65 With Private Health Insurance

Coverage by State, 1989 and 1995

State

Private

health

coverage,

1989

Private

health

coverage,

1995

Difference

in

coverage,

1989-95

U.S. 75.0% 70.5% -4.5

New England 83.2 78.6 -4.6

Connecticut 87.7 81.7 –6.0

Maine 80.5 76.2 –4.3

Massachusetts 81.9 77.7 –4.2

New Hampshire 81.3 81.2 –0.1

Rhode Island 81.5 76.0 –5.5

Vermont 83.6 75.5 –8.1

Middle Atlantic 78.3 72.8 -5.5

New Jersey 81.9 76.6 –5.3

New York 74.5 68.1 –6.4

Pennsylvania 82.0 77.6 –4.4

East North Central 80.6 78.0 -2.6

Illinois 79.1 76.3 –2.8

Indiana 78.8 79.9 1.1

Michigan 79.3 79.0 –0.3

Ohio 82.9 75.9 –7.0

Wisconsin 83.5 82.0 –1.5

West North Central 81.5 78.2 -3.3

Iowa 85.9 80.8 –5.1

Kansas 82.0 72.0 –10.0

Minnesota 84.5 82.1 –2.4

Missouri 77.5 75.4 –2.1

Nebraska 79.4 79.9 0.5

North Dakota 82.7 80.6 –2.1

South Dakota 76.9 78.3 1.4

South Atlantic 74.5 68.7 -5.8

Delaware 73.8 75.2 1.4

District of Columbia 61.8 60.7 –1.1

Florida 70.4 65.1 –5.3

Georgia 73.9 68.1 –5.8

Maryland 81.2 72.6 –8.6

North Carolina 76.1 70.5 –5.6

South Carolina 75.8 68.5 –7.3

Virginia 77.1 72.8 –4.3

West Virginia 72.9 65.9 –7.0

(continued)

Page 52 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix II 

Private Health Insurance Coverage Within

Population Categories, 1989 and 1995

State

Private

health

coverage,

1989

Private

health

coverage,

1995

Difference

in

coverage,

1989-95

East South Central 72.0 68.1 -3.9

Alabama 71.5 73.0 1.5

Kentucky 74.8 68.0 –6.8

Mississippi 64.2 61.3 –2.9

Tennessee 74.7 67.7 –7.0

West South Central 66.6 62.0 -4.6

Arkansas 69.9 66.5 –3.4

Louisiana 66.8 59.1 –7.7

Oklahoma 67.9 63.3 –4.6

Texas 66.0 61.9 –4.1

Mountain 74.2 69.8 -4.4

Arizona 72.1 63.2 –8.9

Colorado 74.2 77.7 3.5

Idaho 77.6 74.4 –3.2

Montana 73.6 69.6 –4.0

Nevada 75.7 72.5 –3.2

New Mexico 64.2 50.5 –13.7

Utah 83.6 80.8 –2.8

Wyoming 79.0 71.6 –7.4

Pacific 68.8 64.4 -4.4

Alaska 65.8 68.3 2.5

California 66.2 61.5 –4.7

Hawaii 78.7 72.4 –6.3

Oregon 78.3 73.9 –4.4

Washington 77.6 74.1 –3.5

Source: U.S. Bureau of the Census, Current Population Survey (Mar. 1989 and Mar. 1996).

Page 53 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix II 

Private Health Insurance Coverage Within

Population Categories, 1989 and 1995

Table II.2: Share of Population Under

Age 65 Covered by Private Health

Insurance, 1989 and 1995 Private health coverage

Age 1989 1995

Difference

in

coverage,

1989-95

Under 18 73.1% 66.1% –7.0

18 to 24 65.1 60.2 –4.9

25 to 34 73.5 68.3 –5.2

35 to 44 81.1 76.2 –4.9

45 to 54 81.4 80.0 –1.4

55 to 64 78.8 76.5 –2.3

U.S. average (0 to 64) 75.0% 70.5% -4.5

Source: U.S. Bureau of the Census, Current Population Survey (Mar. 1989 and Mar. 1996).

Table II.3: Share of Population Under

Age 65 Covered by Private Health

Insurance by Race or Ethnic Group,

1989 and 1995 Private health coverage

Race or ethnic group 1989 1995

Difference

in

coverage,

1989-95

Whitea 82.2% 79.1% –3.1

Blacka 56.4 51.3 –5.1

Hispanic origin 49.9 43.3 –6.6

Othera 67.5 63.7 –3.8

U.S. total (0 to 64 years) 75.0% 70.5% -4.5

aNonhispanic.

Source: U.S. Bureau of the Census, Current Population Survey (Mar. 1989 and Mar. 1996).

Page 54 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix II 

Private Health Insurance Coverage Within

Population Categories, 1989 and 1995

Table II.4: Share of Population Under

Age 65 With Private Health Insurance

Coverage by Annual Family Income,

1989 and 1995 Private health coverage

Income 1989 1995

Difference

in

coverage,

1989-95

Under $10,000 25.6% 19.7% –5.9

$10,000 to $19,999 56.5 42.8 –13.7

$20,000 to $29,999 77.6 64.4 –13.2

$30,000 to $39,999 87.6 77.5 –10.1

$40,000 to $49,999 90.9 85.5 –5.4

$50,000 to $59,999 92.6 88.5 –4.1

$60,000 to $74,999 93.7 90.5 –3.2

$75,000 and above 93.3 92.9 –0.4

U.S. average (0 to 64 years) 75.0% 70.5% -4.5%

Source: U.S. Bureau of the Census, Current Population Survey (Mar. 1989 and Mar. 1996).

Table II.5: Share of Population Under

Age 65 With Private Health Insurance

Coverage by Percent of Poverty Level,

1989 and 1995 Private health coverage

Level 1989 1995

Difference

in

coverage,

1989-95

Poverty level and below 26.5% 21.6% –4.9

101% to 150% of poverty level 52.9 46.7 –6.2

151% to 200% of poverty level 68.7 62.9 –5.8

201% of poverty level and above 89.1 86.8 –2.3

U.S. average (0 to 64 years) 75.0% 70.5% -4.5

Source: U.S. Bureau of the Census, Current Population Survey (Mar. 1989 and Mar. 1996).

Page 55 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix II 

Private Health Insurance Coverage Within

Population Categories, 1989 and 1995

Table II.6: Share of Population Under

Age 65 With Private Health Insurance

Coverage by Industry, 1989 and 1995 Private health coverage

Industry 1989 1995

Difference

in

coverage,

1989-95

Finance, insurance, and real estate 88.9% 88.4% –0.5

Professional and related services 87.8 86.2 –1.6

Mining 88.3 86.2 –2.1

Transportation, communication, and other public

utilities 88.1 84.7 –3.4

Public administration 80.1 84.6 +4.5

Manufacturing 87.3 84.3 –3.0

Entertainment and recreation services 73.5 77.0 +3.5

Trade 75.3 71.1 –4.2

Business and repair services 72.9 67.7 –5.2

Construction 68.9 66.4 –2.5

Personal services, including private households 67.2 62.3 –4.9

Agriculture, forestry, and fisheries 63.8 62.2 –1.6

U.S. average for all workers 80.7% 78.4% -2.3

Source: U.S. Bureau of the Census, Current Population Survey (Mar. 1989 and Mar. 1996).

Table II.7: Share of Population Under

Age 65 With Private Health Insurance

Coverage by Firm Size, Nonelderly

Population, 1989 and 1995 Private health coverage

Number of employees 1989 1995

Difference

in

coverage,

1989-95

Under 25 70.3% 66.9% –3.4

25 to 99 78.7 77.0 –1.7

100 to 499 84.0 82.8 –1.2

500 to 999 88.1 84.6 –3.5

1,000 or more 87.1 85.4 –1.7

U.S. average for all workers 80.7% 78.4% -2.3

Source: U.S. Bureau of the Census, Current Population Survey (Mar. 1989 and Mar. 1996).

Page 56 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix II 

Private Health Insurance Coverage Within

Population Categories, 1989 and 1995

Table II.8: Share of Population Under

Age 65 With Private Health Insurance

Coverage by Employment Status, 1989

and 1995 Private health coverage

Employment status 1989 1995

Difference

in

coverage,

1989-95

Full-time 86.9% 84.2% –2.7

Less than full-time 70.9 68.2 –2.7

Not working 56.7 50.8 –5.9

U.S. average (15 to 64) 75.8% 72.4% -3.4

Source: U.S. Bureau of the Census, Current Population Survey (Mar. 1989 and Mar. 1996).

Page 57 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix III 

Major Contributors to This Report

Michael Gutowski, Assistant Director, (202) 512-7128

Carmen Rivera-Lowitt, Senior Evaluator, (202) 512-4342

John Dicken, Senior Evaluator

Paula Bonin, Senior Evaluator (Computer Specialist)

Page 58 GAO/HEHS-97-122 Private Health Insurance Trends
Appendix III 

Major Contributors to This Report

Page 59 GAO/HEHS-97-122 Private Health Insurance Trends
Related GAO Products

Retiree Health Insurance: Erosion in Employer-Based Health Benefits for

Early Retirees (GAO/HEHS-97-150, July 11, 1997).

Health Insurance for Children: Declines in Employment-Based Coverage

Leave Millions Uninsured; State and Private Programs Offer New

Approaches (GAO/T-HEHS-97-105 Apr. 8, 1997).

Employment-Based Health Insurance: Costs Increase and Family Coverage

Decreases (GAO/HEHS-97-35, Feb. 24, 1997).

Private Health Insurance: Millions Relying on Individual Market Face Cost

and Coverage Trade-Offs (GAO/HEHS-97-8, Nov. 25, 1996).

Health Insurance Regulation: Varying State Requirements Affect Cost of

Insurance (GAO/HEHS-96-161, Aug. 19, 1996).

Health Insurance for Children: Private Insurance Coverage Continues to

Deteriorate (GAO/HEHS-96-129, June 17, 1996).

Health Insurance Portability: Reform Could Ensure Continued Coverage

for Up to 25 Million Americans (GAO/HEHS-95-257, Sept. 19, 1995).

Employer-Based Health Plans: Issues, Trends, and Challenges Posed by

ERISA (GAO/HEHS-96-167, July 25, 1995).

Health Insurance for Children: Many Remain Uninsured Despite Medicaid

Expansion (GAO/HEHS-95-175, July 19, 1995).

Health Insurance Regulation: National Portability Standards Would

Facilitate Changing Health Plans (GAO/HEHS-95-205, July 18, 1995).

Health Insurance Regulation: Variation in Recent State Small Employer

Health Insurance Reforms (GAO/HEHS-95-161FS, June 12, 1995).

Managed Health Care: Effect on Employers’ Costs Difficult to Measure

(GAO/HRD-94-3, Oct. 19, 1993).

Employer-Based Health Insurance: High Costs, Wide Variation Threaten

System (GAO/HRD-92-125, Sept. 22, 1992).

(101513) Page 60 GAO/HEHS-97-122 Private Health Insurance Trends
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