Employment-Based Health Insurance: Medium and Large Employers Can Purchase Coverage, but Some Workers Are Not Eligible
Released: 1998-07-27T00:00:00

Letter

Background

Employment-based health insurance is the leading source of private health insurance in the United States. In 1996, about 64 percent of the population under 65 years old had employment-based health insurance. This employer-based system of health insurance is almost entirely voluntary.

The majority of private business establishments in the United States are small, but most workers are employed by medium and large employers. A business establishment is a single location where economic activity is conducted. As shown in figure 1, establishments with fewer than 20 workers constituted about 88 percent of the total but accounted for only about 26 percent of the U.S. employment in 1996. In contrast, medium and large establishments, with 50 or more employees, represented about 5 percent of the total but accounted for about 58 percent of U.S. employment. Figure 1 also shows that more than one-quarter of all employees work for establishments employing 250 or more people, but these businesses represent less than 1 percent of all establishments. Three industries—services, retail trade, and manufacturing—accounted for the majority (about 73 percent) of all private sector employment in 1996. (See fig. 2.)

Medium and Large Employers Have Nearly Universal Access to Health Insurance

Survey data that we analyzed and our interviews with brokers indicated that virtually all medium and large firms have access to health insurance coverage. Their estimated offer rates of more than 90 percent show that these firms typically take advantage of their access by offering coverage. While the estimated health insurance offer rates between large and small employers differ markedly, the offer rates among medium and large employers vary moderately by firm size and industry and somewhat more widely by state.

As shown in table 1, the estimated percentage of medium and large employers that offered health insurance in 1996 ranged from 91 to 99 percent, with larger firms more likely to offer health insurance than medium firms. In contrast, the estimated offer rate among employers with fewer than 50 employees averaged less than 50 percent, according to a recent KPMG Peat Marwick health benefits survey. Medium employers that do not offer health coverage generally have access to health insurance but may decide for various reasons that they do not need to offer health benefits as part of their employee compensation package or may consider the cost of providing health coverage to be too high relative to their profits or employees’ wages.

The most recent data available that permit analysis of health insurance offer rates by industry sector and states across firm sizes come from the 1993 National Employer Health Insurance Survey (NEHIS), managed by HHS’ National Center for Health Statistics (NCHS). These data show modest variation in the percentage of employers offering health insurance across industry sectors. Among medium and large employers in different industries, the estimated offer rates in 1993 ranged from 88 to 99 percent. The industries with the highest estimated offer rates (more than 95 percent) were wholesale trade; mining; manufacturing; finance, insurance, and real estate; and transportation, communications, and utilities. As shown in figure 3, slightly lower offer rates (between 88 and 94 percent) prevailed in the retail trade; construction; services; and agriculture, forestry, and fishing industries. The industries with estimated lower offer rates are characterized by higher rates of labor turnover and prevalence of temporary and part-time workers. A similar relationship between offer rates and type of industry was found among small employers, but small employers’ offer rates were markedly lower across all industries, ranging from 29 to 56 percent.

Variation by state is wider than by industry. At the state level, the estimated offer rate among medium and large employers ranged from a low of about 72 percent in Wyoming and Texas to almost 100 percent in 14 states. The higher offer rates were concentrated in the Northeast, including the six New England states, New Jersey, and Pennsylvania. Because these estimates are based on survey data, the estimate derived from the sample may be higher or lower than the true percentage of all employers in the state that offer health insurance. Because of the small number of establishments surveyed in certain states, the degree of imprecision for these estimates, as measured by their confidence intervals, can be quite large. Details on the estimated offer rates by firm size in each state and associated confidence intervals for each firm size grouping are in appendix II.

Survey data on offer rates presented above estimate the extent of realized access to insurance, but employers that do not offer health coverage often have potential access. That is, such employers have a choice. According to insurers, insurance brokers, and employers that we interviewed, employers with more than 50 workers generally can get an insurer to write a policy covering their workforce. However, insurers and brokers we interviewed pointed out that the price of such coverage for employers that have close to 50 employees might differ substantially—from employer to employer and from insurer to insurer.

Survey data, studies, and interviews with market participants indicate that variations in health insurance offer rates by firm size, industry, and state reflect decisions that medium and large employers make about offering health coverage, not difficulties they face in obtaining access to health insurance. As discussed below, multiple factors, including the characteristics of a firm and its workforce and the cost of health insurance, influence employers’ health insurance decisions.

Differences in Offer Rates Reflect Firms’ Wage Levels and Other Traits

Although the likelihood of a firm’s offering health insurance is strongly linked with its size, whether an employer offers health coverage to its workers also depends on the characteristics of its workforce, the cost of providing health insurance, the firm’s financial condition, and the competitive environment in which it operates. Many of these factors are interrelated, and while research studies we reviewed do not estimate the separate effect of these factors, our analysis of survey data and research studies illustrates the relationship between offer rates and certain characteristics of a firm’s workforce such as employee earnings and labor turnover.

Our analysis of 1993 NEHIS data supports other studies’ findings that employers’ offer rates are lower when their workforces are characterized by low wages and high labor turnover. In addition, the price of health coverage is likely to contribute to decisions that some medium firms make regarding whether to offer health insurance.

The Role of Wages

NEHIS data show that employers with predominantly low-wage employees—those earning less than $10,000 per year—are less likely to offer health insurance to their workers. The effect is generally stronger the smaller the firm. The difference in estimated health insurance offer rates between employers whose workers typically earned less than $10,000 and those whose workers typically earned $10,000 or more a year in 1993 ranged from 10 percentage points among employers with more than 200 employees to 33 percentage points among employers with 51 to 100 employees. (See table 2.)

The relatively low offer rate among employers with typically low-wage employees is partly because the cost of health insurance represents a substantial expense for both employers and employees. According to Mercer/Foster-Higgins’ 1997 national survey of employers, the nationwide average cost of providing health insurance to an employee ranged from $3,200 per year for a health maintenance organization plan to about $3,500 per year for an indemnity plan. For the employer, paying a significant portion of such premiums would add considerably to the compensation of lower-wage workers or could lead the employer to offset the cost of health insurance by reducing wages. For employees earning lower wages, paying the required share of premium costs may be prohibitive.

Contributions employers make toward employees’ health benefits are excluded from employees’ taxable income. However, this tax exclusion is of lesser value to lower-wage employees who have a lower tax rate than to high-wage employees. Because low-wage workers do not benefit as much as high-wage workers from the tax advantage associated with employer-sponsored health insurance, many low-wage workers are likely to prefer cash wages over health coverage. As a result, lower-wage workers may decline to enroll in an employer-based plan if one is offered. If few workers choose to participate in a plan, the firm may decide not to offer coverage.

The Role of Labor Turnover

Although NEHIS data do not measure the degree of labor turnover, various studies have cited it as predictor of the likelihood that a firm will offer health insurance. Some research literature indicates that firms with high labor turnover rates are less likely to offer health insurance. Quantitative analyses of the link between labor turnover and firms’ decisions to offer health insurance are rare, but several health insurance industry experts we interviewed indicated that this relationship exists. Because labor turnover varies by industry, this relationship can be illustrated by examining industry data. U.S. Bureau of the Census data show that industries that have labor turnover rates higher than the national average such as agriculture, forestry and fishing; services; construction; and retail trade had lower offer rates than industries with low turnover rates. This relationship is illustrated in figure 4, which shows that industries with average monthly labor turnover rates around 10 percent or more had health insurance offer rates below 55 percent. In contrast, industries with average monthly turnover rates below 7 percent had offer rates greater than 60 percent.

The Role of Premium Costs

In health benefits surveys that examine reasons some employers (especially those in smaller firms) do not offer health insurance, employers have frequently cited high premium costs as a key factor in their decisions. However, data needed to determine the extent to which costs affect the decisions medium and large employers make regarding health coverage are lacking. Although data are available on premiums charged to employers who offer health coverage, data are lacking on premium rates that firms not offering health insurance would face if they sought to offer health coverage. To address the lack of data on actual premiums faced by non-offering firms, researchers have developed various indirect methods but have applied them only to data on small employers, the group with the lowest percentage of employers offering health insurance.

Moreover, available data on average premiums may mask important differences in the premiums charged to some medium firms that share some of the characteristics of small employers. For example, recent data collected by a health benefits consulting firm show that health insurance premiums do not vary greatly by employer size. By contrast, some older studies found that insurance companies charged higher premiums to small companies because of the higher risks and higher cost of marketing and claims administration involved in providing coverage to small companies. In addition, research based on data from the 1980s showed that smaller employers have less power to negotiate price discounts than larger employers. However, some studies that report recent data generally do not adjust for differences in the depth and breadth of health benefits offered. Although smaller firms may be paying premiums similar to those paid by larger firms, smaller firms (including those near the 50-employee threshold) generally have less-generous health benefit packages with higher deductibles. In effect, these smaller firms are paying more per dollar of benefits provided or claims reimbursed.

Some insurance brokers we interviewed said that some medium employers (those closer to the 50-employee threshold) face greater variability in health insurance claims cost and in premiums than larger employers. The extent of premium variation depends on how premiums are set. For example, a firm with 55 employees whose premiums are based on experience rating—the group’s historical medical costs—may be charged higher per capita premiums in the future if an employee or dependent were to incur catastrophic medical costs than a firm with 500 to 1,000 employees that also had a single very expensive case. In practice, the extent to which the premium increases for such a firm depends, among other things, on whether the firm can negotiate with its insurer for lower premium costs, the pressures of state regulation that may limit premium variation or restrict premium increases, and the rating practices of the insurer.

Gaps in Eligibility Limit Many Employees’ Access to Health Insurance From Their Employers

Although most medium and large businesses offer health coverage, many employees lack access to the health benefits their employers sponsor. In particular, part-time employees or those with a temporary work arrangement are not eligible for their employer-sponsored health insurance plans. Although more than half of such employees obtain health coverage from other sources, such as through their spouses, Medicare or Medicaid, or the individual insurance market, the uninsurance rates for part-time and temporary employees are high—25 and 33 percent, respectively.

Most Part-Time Workers Ineligible for Employment-Based Health Coverage Rely on Other Sources but Many Are Uninsured

Part-time employees, who constitute about 19 percent of the total workforce, are much less likely to be eligible for health insurance than full-time employees, even though their employers offer coverage. As table 3 shows, in 1997, 31 percent of part-time employees were eligible for their employer-sponsored health insurance compared with 82 percent of full-time employees. Moreover, the percentage of firms in which part-time employees were eligible for coverage declined from 55 percent in 1994 to 47 percent in 1997, according to KPMG Peat Marwick data.

Despite their relatively low eligibility rate, about three-quarters of part-time employees had health insurance coverage in 1997. The main reason for the discrepancy between eligibility and coverage rates is that over half of part-time employees were able to obtain health insurance coverage through other sources, such as other jobs, family members, the individual insurance market, and Medicare or Medicaid. Nonetheless, about one-fourth of the part-time workforce (or 5.4 million employees) was uninsured as of February 1997, according to data from BLS. Uninsured part-time employees accounted for about 27 percent of the 19.9 million uninsured wage and salary workers in 1997. The majority of the uninsured part-time employees were between the ages of 16 and 34, a group that generally has lower earnings compared with most older workers.

Similar disparities between the eligibility of part-time and full-time workers are observed when looking at data for different firm sizes. Agency for Health Care Policy and Research (AHCPR) data for 1996 show that full-time employees were offered health insurance from their current main employers at more than twice the rate of part-time employees for firms with up to 200 employees. For firms with more than 200 workers, the ratio of full-time to part-time rates of eligibility is about 1.7 to 1. (See table 4.)

Temporary Employees Are Less Likely to Be Offered Health Insurance Than Permanent Employees

In addition to work schedule, anticipated job duration—short-term or temporary versus more long-term or permanent—affects the likelihood that employees will be eligible for their employer-provided health benefits. Temporary employees are less than half as likely to be eligible for health coverage than permanent workers. Specifically, of the 5.1 million temporary employees in the U.S. workforce in 1997, only 35 percent were eligible to participate in their employers’ health insurance. In contrast, 74 percent of permanent employees were eligible for their employers’ health insurance.

The percentage of temporary workers eligible for their employers’ health insurance varies across industries. Private-sector industries with the lowest eligibility rates for temporary employees in 1997 were agriculture (18 percent), retail (23 percent), and construction (29 percent). By contrast, eligibility rates for temporary employees were highest among the manufacturing and transportation industries (45 and 46 percent). In general, the data show a direct relationship between the eligibility rates for temporary workers and the offer rates for all employees within a particular industry sector. For example, industries characterized by low rates of eligibility for temporary workers (agriculture, retail trade, and construction) also had relatively low offer rates for all employees, as shown in figure 3.

Although eligibility rates for temporary workers were lower than for permanent workers, two-thirds of temporary workers had health insurance from a variety of sources (often through family health coverage). Nonetheless, the uninsurance rate for temporary workers was about 33 percent (or 1.7 million people) in 1997 compared with 17 percent for permanent workers. Moreover, temporary workers generally earn less than permanent workers. The median weekly earnings of temporary workers in 1997 was $266 compared with $444 for permanent workers.Consequently, many temporary workers might not be able to afford their share of health insurance cost even if they were eligible for their employer-sponsored health plans.

Conclusions

Under HIPAA, insurers cannot deny coverage to a firm with 50 workers or less, but some have questioned whether firms just past this threshold escape the difficulties that small firms used to face. As the evidence presented above shows, virtually all medium and large firms have access to health insurance. However, health coverage is not universal. Despite access to insurance, about 10 percent of firms with 50 to 99 workers (and a small proportion of larger firms) choose not to offer it, and some firms may be deterred by what they see as unfavorable or unaffordable premiums. Perhaps more important, even when an employer offers health insurance, the offer may not extend to all the firm’s workers. Part-time and temporary employees often are not eligible for an employer’s plan, and lower-wage workers may not find it affordable. In the market for health insurance, employers’ and workers’ decisions are voluntary. Consequently, a reversal of an employer’s decision to forgo offering coverage or an employee’s decision to decline an offer hinges on coverage becoming more attractive and affordable.

Comments From Outside Reviewers

We obtained comments on a draft of this report from a number of experts on private health insurance including those with NCHS, the Employee Benefit Research Institute, and the Health Insurance Association of America. The reviewers agreed with the contents of the report and suggested a number of technical corrections that we incorporated where appropriate.

We are sending copies of this report to interested congressional committees and are making copies available to others on request.

Please call me at (202) 512-7114 if you or your staff have any questions about this report. Other GAO contacts and staff acknowledgments for this report are listed in appendix III.

Methodology

The Health Insurance Portability and Accountability Act of 1996 (P.L. 104-191, Aug. 21, 1996) directed us to examine the extent to which classes of large employers in the different states have access to health insurance and the circumstances for the lack of access, if any. In consultation with the offices of the committees interested in the subject matter, we agreed to report on (1) the extent to which medium and large employers in different states and categories have access to health insurance and the barriers (if any) that these employers face in obtaining health insurance; (2) major factors, including health insurance costs, that affect employers’ decisions to offer health insurance; and (3) the extent to which employees are eligible for and covered by their employers’ health insurance.

Medium and Large Employers’ Access to Health Insurance

Because direct measures of access do not exist, we used available data on employers that offer health insurance as a proxy for the extent of access. This may understate the true level of employers’ access to insurance because it excludes employers that have access to health insurance but decide not to offer it to their employees.

To analyze employers’ access to health insurance in different states and classes, we used data covering 1993 (the most recent source for state-level estimates) from the National Employer Health Insurance Survey (NEHIS) and from KPMG Peat Marwick’s survey of employers for 1996.

NEHIS was managed by the National Center for Health Statistics (NCHS), a component of the Centers for Disease Control and Prevention of the Department of Health and Human Services in partnership with the Agency for Health Care Policy Research and the Health Care Financing Administration. This survey had usable responses from about 35,000 private business establishments. The sampling unit for NEHIS was the establishment, defined as “an economic unit, generally at a single physical location, where business is conducted or where services or industrial operations are performed.” A primary reason that NEHIS sampled establishments rather than firms is that establishments are confined within state borders, allowing state estimates.

NEHIS included a probability sample of employers in each state and the District of Columbia, and we used these data because the data set was large enough to allow us to group establishments into categories by number of employees, such as firms with 50 or fewer employees, 51 to 100 employees, 101 to 200 employees, and more than 200 employees, report state-level information; and group establishments into categories, such as type of industry.

Businesses in all states and the District of Columbia are represented in the survey. The minimum number of participating establishments was 383 in Alaska; the maximum number was 1,083 in California. Respondents were asked to describe the characteristics of their firms and their health insurance programs as of December 31, 1993. The results from NEHIS included in this report are for private sector establishments only.

NCHS staff performed certain data analyses for us at our request. We did not independently verify the data entry or data analysis work NCHS performed, although we confirmed that the results of its analyses for us were consistent with results contained in a report NCHS prepared under its own name.

Survey data based on samples of populations are subject to sampling errors, which can be expressed as confidence intervals around a point estimate. The estimated percentage of establishments that offered health insurance in the states, the District of Columbia, and nationwide are shown with the corresponding confidence intervals for those point estimates in appendix II. Those data are depicted as bars, showing the relative position of the estimated offer rates and the confidence interval for those estimates at the 95-percent confidence level. NEHIS data were also used in other tables describing features of establishments that offered health insurance. The estimated sampling errors (at the 95-percent confidence level) for the percentage of establishments offering health insurance are by industry type and firm size, in figure 3, plus or minus 1 percent to plus or minus 9 percent and by general wage level, by firm size and nationwide, in table 2, plus or minus 1 percent to plus or minus 8 percent.

KPMG Peat Marwick

KPMG Peat Marwick conducts and publishes its results from surveys on employee compensation and benefits. We used data from KPMG Peat Marwick (some published and some unpublished) to provide more current estimates of the percentage of business firms in various size categories that offered health insurance in 1996. These survey data included the company’s annual survey of firms employing 200 or more employees, supplemented by an additional survey of firms with fewer than 200 employees. The surveys were stratified random surveys of a total of about 2,600 employers nationwide. While more current than the 1993 NEHIS data, KPMG Peat Marwick did not report state-level estimates from its survey. Thus, we used these data to compare with the NEHIS data at the national level. We did not independently verify the KPMG Peat Marwick data, but these data are widely used by researchers.

Factors Involved in Employer Decisions to Offer Health Insurance

To examine the reasons that employers who had access to insurance decided not to offer health insurance to their employees, we reviewed recent studies on health insurance published by health insurance researchers and our earlier reports and interviewed a broad range of people who were knowledgeable about the insurance market and employers’ behavior. We interviewed benefit consultants and health policy researchers; representatives of employers in California, Pennsylvania, and Virginia who employed from 80 to 185 employees; insurance agents and brokers in California, Maine, Massachusetts, and Oregon; representatives of the Health Insurance Association of America and insurance companies; and state insurance regulators in Oregon, Pennsylvania, Utah, and Wisconsin. We selected the persons we interviewed to provide a geographical cross-section of the nation.

Employee Access to Employer-Sponsored Health Insurance

Another aspect of access to health insurance is the employee’s view. Both an employer and employee may have access to insurance. The employer may decide to offer insurance, but an employee may decline to enroll. People may decline to enroll for a variety of reasons, including not being able to afford the insurance or having coverage through another source, such as another family member’s coverage.

Our data sources for employee access to health insurance included the Agency for Health Care Policy and Research and NCHS’ Medical Expenditure Panel Survey (MEPS) Household Component, which provides current information on health insurance offers and coverage from a sample of about 25,000 persons, and the Bureau of Labor Statistics’ (BLS) 1994, 1995, and 1997 surveys of small, medium, and large employers.

The MEPS data are the source of our estimate of the percentage of employees eligible for their employer-based health insurance plans in 1996, by firm size and work schedule, included in table 4. The sampling errors for those estimates are plus or minus 1 percent to plus or minus 8 percent. Estimates of sampling errors for data we obtained from BLS were not available to us. Although we did not independently verify the accuracy of the data, the MEPS and BLS data that we used were published or made available for others’ use by the sponsoring agencies.

Health Insurance Offer Rates by Firm Size and State, 1993

Staff Acknowledgments

Roger Hultgren, Senior GAO Evaluator, assisted in the design and implementation of the study. Paula Bonin, C. Robert DeRoy, and Elsie Picyk provided analyses of computerized databases.

Related GAO Products

Private Health Insurance: Declining Employer Coverage May Affect Access for 55- to 64-Year-Olds (GAO/HEHS-98-133, June 1, 1998).

Health Insurance Standards: Implications of New Federal Law for Consumers, Insurers, Regulators (GAO/T-HEHS-98-114, Mar. 19, 1998).

Health Insurance Standards: New Federal Law Creates Challenges for Consumers, Insurers, Regulators (GAO/HEHS-98-67, Feb. 25, 1998).

The Health Insurance Portability and Accountability Act of 1996: Early Implementation Concerns (GAO/HEHS-97-200R, Sept. 2, 1997).

Private Health Insurance: Continued Erosion of Coverage Linked to Cost Pressures (GAO/HEHS-97-122, July 24, 1997).

Retiree Health Insurance: Erosion in Employer-Based Health Benefits for Early Retirees (GAO/HEHS-97-150, July 11, 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 Tradeoffs (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 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-95-167, July 25, 1995).

Health Insurance Regulation: Variation in Recent State Small Employer Health Insurance Reforms (GAO/HEHS-95-161FS, June 12, 1995).

Employer-Based Health Insurance: High Costs, Wide Variation Threaten System (GAO/HRD-92-125, Sept. 22, 1992).

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