Federal health debates over the past year have centered on Medicaid, the Affordable Care Act plans for individuals, and, to a lesser extent, Medicare. They have ignored the affordability challenges of employer-sponsored insurance, which covers the most Americans and pays the highest prices for health care. If Congress is not willing and able to tackle high prices in employer-sponsored insurance, it should change the law that prohibits states from effectively doing so. One such idea is described here.
Some Private Health Plans Do Worse Than Others at Lowering Prices
Over 160 million Americans are primarily covered through employer-sponsored insurance, more than the number covered by all other sources of insurance combined (Figure 1). Such coverage is subsidized by excluding payments for employer coverage from taxation which is projected to cost $471 billion in 2026. It is well understood that private insurance pays higher prices for health services, prescriptions, and administration costs than do public insurance programs such as Medicare and Medicaid. What is less well understood, but increasingly documented, is that, among private plans, those that are self-insured pay higher prices than those that are fully insured. Two-thirds of all workers, and 80 percent of workers in large businesses, are in self-insured plans.
FIGURE 1
A “self-insured” (also called “self-funded”) health plan is one where the employer pays the cost of employees’ medical claims through a third-party-administrator or insurer providing administrative services only. The alternative is for employers to buy fully insured plans in which they pay a premium to insurance companies. Since large employers have enough resources to pay for the unexpected or high costs of a sick worker, they tend to self-insure rather than pay for fully insured plans, which charge higher premiums to take on that risk. Only 27 percent of workers in small (less than 200 worker) firms are in self-insured plans. Most insurance companies offer both types of plans so few employees realize the difference. The top three insurers providing administrative services only covered more than 70 million people in 2022.
The Employee Retirement Income Security Act of 1974 (ERISA) regulates employer pension, retirement, welfare, and health plans. The original and main purpose of ERISA is to ensure appropriate administration of the funds in such a plan. Subsequent laws in 1996, 1998, 2008, and the ACA in 2010 added rules for employer health plans’ eligibility, benefits, and cost sharing. However, equally important to what ERISA does is what it prohibits: state regulation of self-insured plans. States have long been the primary regulator of insurance and have significant policies regarding fully insured plans, including those bought by employers, but are preempted from regulating self-insured plans. Employers with workers in multiple states or nationwide often turn to self-insurance to avoid managing different state rules.
Regarding high health care costs, unlike self-insured plans, fully insured plans are subject to state review of premium increases, including disapproval if they are found to be excessive. States can set limits on premium growth, with back-stops to provider price caps to make such coverage more affordable, and take other actions to improve affordability. Competition among fully insured plans for individuals and small businesses also puts pressure on such insurers to lower prices for their plans by reducing payments for covered services. While fully insured plans’ prices are still high, evidence suggests that they are lower than those of self-insured plans. For example, adjusting for demographic differences, payments for commonly used services were 4 percent higher in self-insured plans than in fully insured plans. Another study in Massachusetts—a state with strong regulations—found that the same hospitals received higher payments for the same services from the same insurers when the plan was self-insured versus fully insured. The study suggested that moving all enrollees from fully insured to self-insured plans would raise prices by 8 percent. This suggests that third-party administrators for self-insured plans are not acting as effective stewards of employers’ funds.
Some states have used their institutional provider regulatory authority to limit hospitals’ charge to insurers, but such authority is limited. States have more limited options to affect payment rates for free-standing providers, procedures, and diagnostics, for example.
One Way to Lower Employer Health Insurance Costs: Start with States
The federal government could change ERISA to improve the affordability of self-insured plans. Ideas have been proposed to do so. In the absence of such action, Congress could get out of the way of states seeking to do so. Here, too, proposals exist. States could be permitted to regulate all aspects of self-insured plans except for the fiduciary responsibilities that are different from oversight of fully insured plans and established under ERISA. Reform could also be targeted to addressing the high prices paid by self-insured plans. One three-part proposal is described below.
First, federal policymakers could automatically let a state law trump ERISA if it establishes clear, binding, quantified limits on what self-insured plans pay for in-state providers. For instance, states could require in-network, self-insured plans’ payments to be no more than twice or three times Medicare’s payments for state-based clinics, imaging centers, hospitals, specialists, and other services. Legislation could also let states set maximum payments by self-insured plans for drugs at in-state pharmacies to Medicare negotiated rates. The proposal could go beyond in-network provider rates to enable states to set maximum payment rates for state-based out-of-network providers, replacing the No Surprises Act independent dispute resolution process that has proven costly. States could also cap administrative costs through policies such as medical loss ratio limits with reforms. The proposal could limit the ERISA override to state laws that apply to all types of private plans for simplicity and equity for all privately insured state residents.
Second, the proposal could include provisions for accountability and transparency from states with laws that set price caps and the private plans affected by them. For example, it could require states to use Medicare rates to benchmark payment ceilings. Doing so would give ERISA fund managers insight for additional price negotiations. It would also help federal and other state officials compare state laws on an apples-to-apples basis for extension, evaluation, and adjustment. Self-insured and fully insured plans, in turn, would have to annually report in a standardized format premium reductions from state-set payment rate ceilings.
Third, the proposal could create a Commercial Payment Advisory Commission or ComPAC to formally collect private plans’ reports, track state policy, and recommend other changes to improve the affordability of private insurance. Like the Medicare Payment Advisory Commission and Medicaid and CHIP Payment and Access Commission, ComPAC would have commissioners and staff who are federal employees. It would produce data reports, review trends, conduct evaluations of the impact of state laws on different facets of the system such as access and supply, and make policy recommendations for Congress. Its scope could include individually purchased private coverage as well employer-sponsored insurance. It may be that establishing ComPAC is a first step, prior to the proposed state ERISA override, or a free-standing proposal in light of the significant enrollment, federal budget effects, and impact of private insurance in the United States.
Discussion
This proposal has a number of advantages. It would enable states to lower the cost of employer-sponsored insurance for their businesses, workers, and families. It would give self-insured plans in such states both direct savings and leverage to negotiate payment rates below the state-set, Medicare-based upper payment limits for the providers in their networks. This negotiating power could be enhanced if states enacted an out-of-network cap on provider, drug, and administrative payment rates. Such a proposal would maintain the core of ERISA policies regarding safeguarding of funds and consistent benefits across states.
For Congress, this proposal promotes federalism that allows states to enact reforms that improve consumer protections: the long-standing basis for health insurance law. It would likely result in federal budget savings in the form of increased revenue. Its ComPAC could enable additional savings by offering new ideas for improving the efficiency and efficacy of private coverage—innovation that has been lacking to date and that could catalyze policy change.
And for states, the proposal offers an opportunity to tackle a top issue for their residents: the affordability of the major type of employer-sponsored health insurance.
The proposal’s disadvantages include that it would further complicate the U.S. health system. If some but not all states passed such a law, it would result in a patchwork of policies, creating more work for self-insured plan sponsors. States may also face the same headwinds as Congress on passing legislation that reduces health care prices.
That said, giving states the option to tackle the least cost-effective part of the U.S. health system, and focusing on it through a ComPAC, may be a step toward comprehensive reform.
Tags: Employer coverage, healthcare, insurance
Let States Lead on Lowering the Cost of Employer-Sponsored Insurance
Federal health debates over the past year have centered on Medicaid, the Affordable Care Act plans for individuals, and, to a lesser extent, Medicare. They have ignored the affordability challenges of employer-sponsored insurance, which covers the most Americans and pays the highest prices for health care. If Congress is not willing and able to tackle high prices in employer-sponsored insurance, it should change the law that prohibits states from effectively doing so. One such idea is described here.
Some Private Health Plans Do Worse Than Others at Lowering Prices
Over 160 million Americans are primarily covered through employer-sponsored insurance, more than the number covered by all other sources of insurance combined (Figure 1). Such coverage is subsidized by excluding payments for employer coverage from taxation which is projected to cost $471 billion in 2026. It is well understood that private insurance pays higher prices for health services, prescriptions, and administration costs than do public insurance programs such as Medicare and Medicaid. What is less well understood, but increasingly documented, is that, among private plans, those that are self-insured pay higher prices than those that are fully insured. Two-thirds of all workers, and 80 percent of workers in large businesses, are in self-insured plans.
FIGURE 1
A “self-insured” (also called “self-funded”) health plan is one where the employer pays the cost of employees’ medical claims through a third-party-administrator or insurer providing administrative services only. The alternative is for employers to buy fully insured plans in which they pay a premium to insurance companies. Since large employers have enough resources to pay for the unexpected or high costs of a sick worker, they tend to self-insure rather than pay for fully insured plans, which charge higher premiums to take on that risk. Only 27 percent of workers in small (less than 200 worker) firms are in self-insured plans. Most insurance companies offer both types of plans so few employees realize the difference. The top three insurers providing administrative services only covered more than 70 million people in 2022.
The Employee Retirement Income Security Act of 1974 (ERISA) regulates employer pension, retirement, welfare, and health plans. The original and main purpose of ERISA is to ensure appropriate administration of the funds in such a plan. Subsequent laws in 1996, 1998, 2008, and the ACA in 2010 added rules for employer health plans’ eligibility, benefits, and cost sharing. However, equally important to what ERISA does is what it prohibits: state regulation of self-insured plans. States have long been the primary regulator of insurance and have significant policies regarding fully insured plans, including those bought by employers, but are preempted from regulating self-insured plans. Employers with workers in multiple states or nationwide often turn to self-insurance to avoid managing different state rules.
Regarding high health care costs, unlike self-insured plans, fully insured plans are subject to state review of premium increases, including disapproval if they are found to be excessive. States can set limits on premium growth, with back-stops to provider price caps to make such coverage more affordable, and take other actions to improve affordability. Competition among fully insured plans for individuals and small businesses also puts pressure on such insurers to lower prices for their plans by reducing payments for covered services. While fully insured plans’ prices are still high, evidence suggests that they are lower than those of self-insured plans. For example, adjusting for demographic differences, payments for commonly used services were 4 percent higher in self-insured plans than in fully insured plans. Another study in Massachusetts—a state with strong regulations—found that the same hospitals received higher payments for the same services from the same insurers when the plan was self-insured versus fully insured. The study suggested that moving all enrollees from fully insured to self-insured plans would raise prices by 8 percent. This suggests that third-party administrators for self-insured plans are not acting as effective stewards of employers’ funds.
Some states have used their institutional provider regulatory authority to limit hospitals’ charge to insurers, but such authority is limited. States have more limited options to affect payment rates for free-standing providers, procedures, and diagnostics, for example.
One Way to Lower Employer Health Insurance Costs: Start with States
The federal government could change ERISA to improve the affordability of self-insured plans. Ideas have been proposed to do so. In the absence of such action, Congress could get out of the way of states seeking to do so. Here, too, proposals exist. States could be permitted to regulate all aspects of self-insured plans except for the fiduciary responsibilities that are different from oversight of fully insured plans and established under ERISA. Reform could also be targeted to addressing the high prices paid by self-insured plans. One three-part proposal is described below.
First, federal policymakers could automatically let a state law trump ERISA if it establishes clear, binding, quantified limits on what self-insured plans pay for in-state providers. For instance, states could require in-network, self-insured plans’ payments to be no more than twice or three times Medicare’s payments for state-based clinics, imaging centers, hospitals, specialists, and other services. Legislation could also let states set maximum payments by self-insured plans for drugs at in-state pharmacies to Medicare negotiated rates. The proposal could go beyond in-network provider rates to enable states to set maximum payment rates for state-based out-of-network providers, replacing the No Surprises Act independent dispute resolution process that has proven costly. States could also cap administrative costs through policies such as medical loss ratio limits with reforms. The proposal could limit the ERISA override to state laws that apply to all types of private plans for simplicity and equity for all privately insured state residents.
Second, the proposal could include provisions for accountability and transparency from states with laws that set price caps and the private plans affected by them. For example, it could require states to use Medicare rates to benchmark payment ceilings. Doing so would give ERISA fund managers insight for additional price negotiations. It would also help federal and other state officials compare state laws on an apples-to-apples basis for extension, evaluation, and adjustment. Self-insured and fully insured plans, in turn, would have to annually report in a standardized format premium reductions from state-set payment rate ceilings.
Third, the proposal could create a Commercial Payment Advisory Commission or ComPAC to formally collect private plans’ reports, track state policy, and recommend other changes to improve the affordability of private insurance. Like the Medicare Payment Advisory Commission and Medicaid and CHIP Payment and Access Commission, ComPAC would have commissioners and staff who are federal employees. It would produce data reports, review trends, conduct evaluations of the impact of state laws on different facets of the system such as access and supply, and make policy recommendations for Congress. Its scope could include individually purchased private coverage as well employer-sponsored insurance. It may be that establishing ComPAC is a first step, prior to the proposed state ERISA override, or a free-standing proposal in light of the significant enrollment, federal budget effects, and impact of private insurance in the United States.
Discussion
This proposal has a number of advantages. It would enable states to lower the cost of employer-sponsored insurance for their businesses, workers, and families. It would give self-insured plans in such states both direct savings and leverage to negotiate payment rates below the state-set, Medicare-based upper payment limits for the providers in their networks. This negotiating power could be enhanced if states enacted an out-of-network cap on provider, drug, and administrative payment rates. Such a proposal would maintain the core of ERISA policies regarding safeguarding of funds and consistent benefits across states.
For Congress, this proposal promotes federalism that allows states to enact reforms that improve consumer protections: the long-standing basis for health insurance law. It would likely result in federal budget savings in the form of increased revenue. Its ComPAC could enable additional savings by offering new ideas for improving the efficiency and efficacy of private coverage—innovation that has been lacking to date and that could catalyze policy change.
And for states, the proposal offers an opportunity to tackle a top issue for their residents: the affordability of the major type of employer-sponsored health insurance.
The proposal’s disadvantages include that it would further complicate the U.S. health system. If some but not all states passed such a law, it would result in a patchwork of policies, creating more work for self-insured plan sponsors. States may also face the same headwinds as Congress on passing legislation that reduces health care prices.
That said, giving states the option to tackle the least cost-effective part of the U.S. health system, and focusing on it through a ComPAC, may be a step toward comprehensive reform.
Tags: Employer coverage, healthcare, insurance