Center for Studying Health System Change

Employer-Targeted Premium Subsidies Increase Health Coverage Only Modestly

Study Shows Large Subsidies Needed to Expand Coverage Significantly

News Releases
December 18, 2001

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ASHINGTON, D.C.—Only about 500,000 of the 16 million people working in small firms not currently offering health insurance would gain coverage through a 30 percent premium subsidy targeted at employers, according to a study released today by the Center for Studying Health System Change (HSC).

"The findings indicate that using employer-targeted premium subsidies to expand coverage through employer-sponsored health insurance would be neither cheap nor easy," said James D. Reschovsky, Ph.D., senior health researcher at HSC, a nonpartisan policy research organization funded solely by The Robert Wood Johnson Foundation (RWJF).

"Attempts to leverage public and private funding to expand health coverage through subsidies, including individual tax credits or employer-targeted subsidies, are definitely worth exploring," said HSC President Paul Ginsburg, Ph.D. "But this study suggests that subsidies, whether directed at employers or individuals, will have to be large to make a significant difference in reducing the number of uninsured."

A second HSC study released today shows state and local communities are moving forward with a variety of premium subsidy programs designed to leverage public and private funding to expand coverage for the uninsured.

While state and local leaders are enthusiastic about the potential of subsidies to decrease the number of uninsured people, these relatively new programs have had limited success and face complex regulatory requirements and difficult trade-offs between the scope of benefits offered and available funding. Another challenge is to design subsidies large enough to attract enrollees without encouraging substitution of existing employer contributions for workers’ health benefits.

"Initial experience suggests premium subsidy programs are costly and difficult to design and operate," said Cara S. Lesser, HSC director of site visits. "But, the recession and rising health insurance costs are going to put pressure on policy makers to find innovative ways to maintain and expand coverage, and premium subsidies are one option."

Both studies are detailed in two new HSC Issue Briefs, Employer Health Insurance Premium Subsidies Unlikely to Enhance Coverage Significantly and Premium Subsidies for Employer-Sponsored Health Coverage: An Emerging State and Local Strategy to Reach the Uninsured. Both are available here.

An estimated 38.7 million Americans were uninsured in 2000, according to the U.S. Census Bureau, and HSC research has shown that nearly 75 percent of the uninsured live in households with at least one full-time worker, many of whom work in small firms.

According to the first HSC study, about 33.8 million people nationally work in firms with fewer than 50 employees, but almost half—16 million—work for firms that don’t offer health insurance. A hypothetical 30 percent premium subsidy would reduce the cost of an average policy offered by small firms in 2001 for single coverage by $820, from $2,732 to $1,912 a year, and the cost for family coverage by $1,930, from $6,434 to $4,504 a year.

Analyzing the 1999 HSC Community Tracking Study Household Survey and the 1997 RWJF Employer Health Insurance Survey, HSC researchers estimated that a 30 percent premium subsidy to help offset the insurance costs of small firms not offering coverage would increase these firms’ insurance offer rate only 6 percentage points from the current 40 percent to 46 percent. While the cost of insurance is an important factor in small firms’ decision to offer health coverage, the study indicates that most small firms won’t respond to small changes in the cost of insurance when deciding whether to offer coverage.

Under the study’s scenario, 1.5 million of the 16 million workers in small firms not offering coverage would gain offers of health insurance, reducing the number of workers lacking coverage offers to 14.6 million.

Since 59 percent of workers in small firms have other coverage sources—typically through spouses or public insurance—the number of uninsured workers gaining offers of employer coverage would increase by only about 600,000 people. And, not all uninsured workers would opt to take up offered coverage, leaving only about 500,000 workers, or about 3 percent of the 16 million currently without coverage offers, who would likely gain coverage through a 30 percent subsidy.

If subsidies were available to small firms that already offer health insurance, which seldom happens now in state and local programs, workers would likely benefit from lower premium sharing or higher wages, prompting more workers to take up coverage. The additional reduction in the number of uninsured people would be quite modest but extremely costly, since nearly all eligible firms already offering coverage would likely take advantage of the subsidy.

But, not extending subsidies to firms already offering coverage raises equity issues because equally deserving employers already providing coverage would be ineligible. Along with small employers’ relatively low receptiveness to premium subsidies, employer subsidies face another fundamental problem: targeting low-income, uninsured workers because the subsidies go directly to the firm and not the worker.

Of the 16 million small-firm workers lacking coverage offers, only 3 million, or 18 percent, are both uninsured and have family incomes less than 200 percent of poverty, or about $35,000 a year for a family of four in 2001. Employer-targeted subsidies inevitably would help people who are neither poor nor uninsured.

An alternative would be to provide subsidies directly to low-income, uninsured workers. While this would allow for better targeting of benefits, other research suggests that these workers, like small employers, are not very responsive to premium subsidies, meaning subsidies would have to be large and costly to significantly reduce the number of uninsured.

The second HSC study, based on interviews with health care leaders in 12 nationally representative markets, found six of the 12 sites have premium subsidy programs planned or underway. These state and local efforts include subsidies targeted at employer and subsidies paid directly to low-income, uninsured workers. The programs use a variety of funding sources that often dictate the flexibility of program designs.

In Massachusetts and New Jersey, federal/state subsidy programs have the least flexibility in benefit design and cost sharing but have larger budgets, while state-only programs in New York and Washington and proposed local programs in Lansing, Mich., and Indianapolis have more flexibility and can offer less generous benefits packages but have smaller budgets.

Ron Pollack, executive director, Families USA
"Trying to build on the employer-sponsored health insurance system to extend coverage to the uninsured has merit, but this study clearly indicates that subsidies will have to be large to make a difference for low-income, uninsured working Americans. This approach provides less bang for the buck, and, therefore, we should build on existing public programs, like Medicaid and the State Children’s Health Insurance Program, to expand coverage."

Don Young, M.D., president, Health Insurance Association of America
"Policy makers on all sides of this issue recognize that bringing high quality, affordable health coverage to more Americans is a challenging task. Yet, we know that the cost of coverage is the primary barrier to getting more people insured. Premium subsidies aren’t the only answer, but they attack the problem head on and are an excellent way of building on the successes of the employment-based health insurance system. Still, these studies demonstrate that we should leave no stone unturned in our continuing search for other ways to enhance the private market’s ability to meet the health insurance needs of all Americans."

Kate Sullivan, health policy director, U.S. Chamber of Commerce
"Small employers’ health plan costs escalate at a faster rate because they must purchase insured health plans which, unlike larger companies that self-insure and thus pay only actual health claims, come with the added cost of overhead, marketing, anticipated impact of state regulation and claims experience, and, in some cases, profit for the insurer. However, this study underscores that offering a subsidy only to the employer is not the right answer, particularly if the subsidy is limited to previously uninsured businesses or if employers must calculate income eligibility for employees. The best solution is to allow small businesses to band together and self-insure in order to gain the same market efficiencies of larger companies."