What Employers Say About the Future of Employer-Sponsored Health Insurance

Abstract

• Goal: To examine the conditions that might lead employers to offload the provision of health benefits.
• Issue: Employer-sponsored health benefits have persisted despite recent policy changes and broader trends, such as the Affordable Care Act (ACA), private health exchanges, and health care cost inflation. However, new policy initiatives, such as the extension of ACA subsidies and the provision of a public option, may cause companies to reconsider their practice of offering health benefits to their workers.
• Methods: We conducted interviews with more than two dozen benefits executives working in a variety of industries and representing firms that employ from 300 to 250,000 employees.
• Key Findings and Conclusion: Employers often view themselves as paternalistic: they wish to make it easier for their workers to get affordable health coverage. They also do not want to relinquish control over health plans, viewing health benefits as a valuable recruitment and retention tool. Accordingly, the benefits executives we interviewed found it difficult to imagine future circumstances that would lead their companies to stop providing health coverage.

Introduction

The longstanding bond between employers and health insurance dates back to World War II, when the implementation of wage controls prompted companies to seek out ways to differentiate themselves from their competitors in a bid to attract workers. Since then, rules exempting employer spending on health benefits from taxation, as well as several failed attempts to implement a universal coverage system, have cemented the role of employers in providing health benefits. Today, employer-sponsored insurance represents the single largest source of health benefits in the United States, covering more than 70 percent of workers, 53 percent of children, and 36 percent of nonworking adults (see the exhibit below).¹

However, recent and future policy changes may test employers’ role in providing health benefits. The American Rescue Plan Act (ARPA) expanded subsidy eligibility and generosity for people who purchased health plans from Affordable Care Act (ACA) exchanges, and the Inflation Reduction Act (IRA) has extended these premiums through 2025.² The Biden administration also has addressed the “family glitch” to make more families eligible for subsidies³ and has explored adding a “public option” to ACA exchanges. These changes may start to chip away at the strong bond between employment and health insurance benefits.

To explore the impact of health care reforms on employers and the conditions that might compel companies to cease providing health benefits, the Employee Benefit Research Institute (EBRI) interviewed 26 benefits executives who had at least a moderate amount of decision-making power over their firm’s benefits offerings. The interviews were conducted “on background,” so that participants could speak freely without fear of attribution. All interviewees were asked the same questions but were encouraged to elaborate on their explanations. Interviewees represented firms in a wide range of industries, such as technology, manufacturing, restaurants, utilities, and financial services. All told, these companies covered more than 1,200,000 lives and more than $6.5 billion on health benefits in 2021. (For more details, see “How We Conducted This Study.”)

Findings

Impact of the Affordable Care Act: Not as Predicted

The ACA presented an opportunity to challenge the status quo of employment-based benefits, with analysts predicting employers would eventually redirect workers to ACA exchanges.⁴ Yet the link between employment and health benefits has not wavered since passage of the ACA; as previously noted, 70 percent of workers receive coverage through an employer-sponsored plan.

When asked why employers did not embrace ACA exchanges to offload the responsibility of providing health benefits, benefits executives’ responses echoed several themes. First, employers thought they could offer their workers a better deal than what employees could conceivably get on public exchanges. “We liked to have control. We can do a better job with design than the exchanges,” explained a benefits executive at a health care company.

Second, many of the benefits executives viewed their companies as paternalistic. “[Employees] trust their employer, and that the employer will give them the tools and knowledge they need to navigate their care,” said a benefits executive at a large financial services firm. Some also flagged complexity as a potential issue, given that public exchanges typically offer significantly more plans than employers do, and the vast array of choices may overwhelm workers. “Every survey we’ve done says that our workers want more choice, but when that choice comes, they want us to choose for them,” explained a benefits executive at a telecommunications firm.

Finally, some employers simply took a wait-and-see approach to determine if other companies were willing to upend their employee health benefits. “A big part was trepidation,” explained a benefits executive at an insurance company. “Nobody wanted to be first.”

Why Did Private Health Exchanges Never Take Hold?

Many benefits consultants believed private health exchanges would transform health benefits by giving workers greater choice, a goal that companies also hoped to achieve through other benefits changes — such as moving from defined benefit to defined contribution retirement plans. Private health exchanges gained some early traction when Sears and Darden Restaurants announced they would allow their workers to purchase insurance from a private exchange operated by a benefits consultancy in 2013. However, aside from several early adopters, private exchanges did not gain much uptake.

When interviewees were asked why that was the case, several themes emerged that mirrored employers’ views on the ACA’s impact on employer health coverage. Once again, many interviewees invoked paternalism as a reason for keeping their employer-sponsored plan. “It would make workers feel like you were cutting and running,” said a benefits executive at a manufacturing firm. “We don’t want [workers] out shopping on their own, [exchange plans] aren’t easy to understand,” added a benefits executive at a financial services company.

Private exchanges did have their appeal, but benefits managers were wary about giving up control, believing that they could better contain costs and provide a better experience for employees than private exchanges. “The problem is escalating costs going forward . . . there [would be] no control over what would happen,” explained a benefits executive at an insurance provider. An executive at a large technology firm had similar concerns: “We don’t want employees coming back to us after a few months, saying ‘this doesn’t work for us.’”

Individual Coverage Health Reimbursement Accounts: Not a Fit for Employers or Employees

Individual coverage health reimbursement accounts (ICHRAs) represent another opportunity for employers to change how they provide health benefits. Created by a rule enacted in 2019, ICHRAs let workers purchase health plans from ACA exchanges using pretax dollars from an account funded by their employer.⁵ This allows employers to limit their involvement in selecting health benefits for their employees.

To start, many interviewees indicated that they were not familiar with ICHRAs. When informed about them, interviewees were skeptical that their companies would take this approach in the near future. Their reasons — wanting to retain control over plan design, for example — echoed their rationale for maintaining the status quo in the face of other developments, such as the advent of private exchanges.

Several interviewees noted that funding ICHRAs and shunting workers to ACA exchanges deprived the company of the opportunity to bend its cost curve. Keeping workers enrolled in employer-sponsored insurance allows companies to employ strategies to help workers manage expensive health conditions. For instance, IRS Notice 2019-45 allowed employers to cover certain drugs and services on a predeductible basis for workers enrolled in high-deductible health plans with health savings accounts (HSAs). Employers that adopted these provisions may have been motivated by a desire to lower barriers to low-cost preventive care and reduce the probability of high-cost claims.

By giving workers ICHRAs to purchase insurance on public exchanges, companies effectively forfeit this control. “I don’t know that insurance companies can manage [medical cost] trend better than we can,” explained a benefits executive at a large manufacturing firm. Additionally, employers would have less control over rising premiums and how those higher costs would affect their workers. “Workers would be dealing with an entity that isn’t sensitive to increasing their premiums,” said a benefits executive at a financial services company.

Aside from worries about costs, benefits executives flagged other issues that made them reluctant to offer ICHRAs or direct workers toward public exchanges. Several interviewees noted that employees trust their employers to provide a suitable menu of health benefits options. “In general, they want their employer to be a trusted ally,” said one benefits executive at a large technology firm. “[Employees] trust the employer has done the research about shopping the best deal . . . [employees] don’t feel comfortable doing that on their own, they would rather you do that for them,” explained a benefits executive at a midsized manufacturing firm.

Several executives also noted that employees do not necessarily relish the idea of taking greater control over their health care plan decisions and choosing from a large menu of options. “[Employees] don’t really take the time or energy to really understand, and they don’t want to. They trust us to make the decision for them,” said one benefits executive at a financial services firm.

Frustration Over High Costs and Misaligned Incentives

Escalating costs may prove to be another challenge to employer-sponsored insurance. A 2020–2021 study conducted by the Purchaser Business Group on Health found that 87 percent of the companies they surveyed thought the cost of providing health benefits would be unsustainable within the next five to 10 years.⁶ Nearly all the benefits executives EBRI interviewed were frustrated by ever-escalating costs, but they did not necessarily perceive the cost increases to be unsustainable.

Several benefits executives were especially troubled by the high cost of prescription drugs. “If there’s a place where companies feel comfortable with government stepping in, it’s specialty drugs,” said one benefits executive, echoing a sentiment made by several other interviewees. One benefits executive at a nationwide restaurant chain expressed particular concern over the million-dollar drugs currently in the development pipeline: “We have no control, and it’s getting worse.” Meanwhile, a benefits executive at an insurance company summed up their frustration working with pharmacy benefit management companies to curb drug spend: “Pharmacy benefit managers are making everything opaque, and they’re getting kickbacks for steering things one way or the other . . . consultants aren’t aligned with you, there are inherent conflicts of interest . . . [they’re] doing what’s best for themselves.”

Interviewees also voiced concern over increased health care provider market concentration and power and the role this phenomenon plays in making health care costlier. In recent years, there were “lots of vertical mergers that increased [health care providers’] pricing power,” leading to higher costs, explained a benefits executive at a manufacturing firm. Currently, “there is even more unrestricted play with prices in health care delivery, and it leads to some bad behavior . . . that’s the kind of power that consolidation has allowed,” lamented a benefits executive at a technology firm.

Despite concerns over high prices, specialty drugs, and market concentration, interviewees expressed skepticism that the status quo would change soon and optimism that they could navigate further challenges. “I’ve been doing this for 30 years — companies have always [complained about costs],” said one benefits executive at a large consumer goods firm. Even faced with the prospect of costs rising indefinitely, another executive said, “There are tools to manage costs . . . employers are nimble enough. There’ll be something new.” A third interviewee summarized the prevailing view this way: “We’ve been saying for a long time that costs are unsustainable, but apparently they’re sustainable . . . we’ve always made it work.”

Conclusion

The link between employers and health benefits has been tested in recent years. The ACA, private exchanges, ICHRAs, and the rising costs of providing health benefits were all threats that analysts and pundits alike had predicted would erode the relationship between employment and health benefits. Future policy and economic developments may pose yet another threat to the bond between employment and health benefits. This includes the permanent extension of ACA subsidies, the implementation of a public option, and continued health care cost increases that outpace inflation.

Yet the will for employers to provide health benefits to their workers remains strong. It seems unlikely, given the interviews EBRI conducted, that these forces would cause companies to abandon employer-sponsored insurance. Most interviewees expressed a strong skepticism that their firms would drop health benefits or direct their workers toward marketplace exchanges. Interviewees cited the strong labor market as a roadblock; with historically low unemployment rates at the time of the interviews, benefits executives felt that they could not diminish the generosity of their benefits packages without risking their competitiveness for talent. Broadly, companies continue to view their health benefits as a recruitment and retention tool; cutting these benefits would hamper their efforts to cultivate a strong workforce.

Despite changes in public policy, few benefits executives can imagine the conditions that would lead employers to forgo providing health benefits for their workers. A sense of paternalism, the desire to use health benefits as a recruitment and retention tool, and the preference to retain control over plan design help explain why employers may be inclined to maintain the status quo.

Finally, benefits executives simply may be more inclined to have a rosier outlook on the future provision of health benefits than the rest of their firm’s management. As one of those interviewed put it, not providing health benefits “means dismantling certain roles, [and] maybe that’s why benefits people aren’t pushing it.”