Insurance—Those with and Those Without

In 1798 Congress established the U.S. Marine Hospital Services for seamen. It was the first time an employer offered health insurance in the United States. Payments for hospital services were deducted from the sailors' salaries.

In the twenty-first century many factors affect the availability of health insurance, including employment, income, personal health status, and age. As a result, an individual's or family's health insurance status often changes as circumstances change. In 2004 nearly six of every ten Americans (59.8%) were covered during all or some part of the year by private insurance through their employers. Medicare, the government's health insurance program for older adults and people with disabilities, covered 13.7% of Americans, and Medicaid, the government health insurance program for the poor, covered 12.9%. (See Figure 6.1.) (Note that percentages come close to 100% because some people are covered by more than one type of insurance program, yet in 2004, 15.7% of people were not covered by any type of insurance.)

In 2004 the 15.7% of the American population without health coverage was unchanged from 2003, but was less than the 16.3% peak of uninsured rate in 1998. (See Figure 6.2.) In the report Income, Poverty, and Health Insurance Coverage in the United States: 2004 (April 2006, http://www.census.gov/prod/2005pubs/p60-229.pdf), Carmen DeNavas-Walt, Bernadette D. Proctor, and Cheryl Hill Lee report that after the 1998 high, the rate dropped for two consecutive years to 14.2% in 2000 and then increased for three years before stabilizing at 15.7%.

According to the Centers for Disease Control and Prevention (CDC), 2005 marked the fourth consecutive yearly rise in the number of American adults without health insurance coverage. The National Health Interview Survey (NHIS; 2006, http://www.cdc.gov/nchs/data/nhis/earlyrelease/insur200606.pdf) notes that from January through September 2005 there were 51.3 million people who were uninsured for at least part of the twelve months preceding the survey. Slightly more than 14% (41.1 million) of people of all ages were uninsured adults, and 16% (40.8 million) were under age sixty-five. Nearly 19% (34.4 million) of people age eighteen to sixty-four were uninsured, as were 8.8% (6.5 million) of children under age eighteen. Figure 6.3 shows the percentages of children and adults age eighteen to sixty-four that were uninsured at the time of the survey, at least part of the year, and the percentage that had been uninsured for more than a year, as well as the percentages of children and adults covered by public and private insurance.

WHO WAS UNINSURED IN 2004 AND 2005?

Not surprisingly, in 2004 people with lower household incomes—below $25,000 and from $25,000 to $49,999—were more than twice as likely as to be uninsured than those with higher incomes. Table 6.1 shows that in 2004, 24.3% of people with an income less that $25,000 and 20% of those with earnings between $25,000 and $49,999 lacked insurance, compared with 13.3% of those with incomes ranging from $50,000 to $74,999 and just 8.4% of those with incomes more than $75,000.

The proportion of people who did not have health insurance was greatest in the South and West. In the South 18.3% of people were uninsured at the time of the NHIS, and 21.7% of people in the South had been uninsured for at least part of the year before the survey. In the West the percentages for these two groups were 15.8% and 19.4%, respectively. People with less than a high school education were much more likely to have been uninsured than those with more than a high school education. (See Table 6.2.)

The report Gaps in Health Insurance: An All American Problem (April 2006, http://www.cmwf.org/usr_doc/Collins_gapshltins_920.pdf) by Sara R. Collins et al. notes that the percentage of working-age Americans with moderate to middle incomes—between $20,000 and $40,000 per year—that was uninsured for at least part of the year rose from 28% in 2001 to 41% in 2005. The vast majority of the uninsured were low-income families and working families—forty-eight million working-age people were uninsured during the year, and two-thirds (67%) of the uninsured were in families where at least one person was employed full time. Collins et al.'s survey of 4,350 adults ages nineteen and older also finds that more than half of the uninsured adults said they were having problems paying their medical bills or had incurred debt to pay for their medical expenses.

Gender, Age, and Race/Ethnicity

Among people under sixty-five years old, the percentage of people without insurance in 2005 was highest among young adults ages eighteen to twenty-four (28.7%) and lowest among young people less than eighteen years old (8.8%). Among adults ages eighteen to forty-four, men were more likely than women to be uninsured. (See Figure 6.4.) Hispanics were most likely to be uninsured at the time of the NHIS, as well as for part of the year or more than a year preceding the interview. About one-third of Hispanics was uninsured at the time of the interview or had been uninsured during the year, and nearly one-quarter had been uninsured for more than a year. By contrast, 11.9% of African-Americans and 6.6% of whites had been uninsured for more than a year. (See Table 6.2.)

LACK OF INSURANCE HAS SIGNIFICANT CONSEQUENCES

In Sicker and Poorer: The Consequences of Being Uninsured (May 2002, http://www.kff.org/uninsured/upload/Full-Report.pdf), a landmark report prepared for the Kaiser Commission on Medicaid and the Uninsured, Jack Hadley discusses an exhaustive review of the literature detailing the major findings of more than twenty-five years of health services research on the effects of health insurance. Hadley notes that the uninsured receive less preventive care, are diagnosed at more advanced stages of disease, and receive less treatment as measured in terms of pharmaceutical and surgical interventions.

Besides receiving less medical care and treatment, uninsured people often pay more for medical care. In the article "Uninsured Patients Pay Far More for Care" (Associated Press, June 25, 2004), Lara Jakes Jordan reports that hospitals routinely overcharge people without health insurance—as much as four times more than insured hospital patients are charged. The overcharging is attributed to hospitals' efforts to recoup the costs of providing care to people who are indigent.

Hadley concludes that if the uninsured were provided with health insurance, their mortality rates would be reduced by between 10% and 15%. The reduction in mortality would largely result from improved access to timely and appropriate care. This finding supports the Institute of Medicine's estimate that eighteen thousand Americans die each year because they lack health insurance. Furthermore, better health would enable uninsured people to improve their annual earnings by 10% to 30% and would also act to increase their educational attainment.

California Healthline, in "Workers Delay Medical Treatment" (April 28, 2006, http://www.californiahealthline.org/index.cfm?Action=dspItem&itemID=120830&ClassCD=CL120), confirms that escalating health care costs continue to induce some businesses to either completely eliminate health care coverage or shift more costs to workers, who may not be able to pay higher premiums. According to E. Richard Brown, the director of the University of California, Los Angeles, Center for Health Policy Research, this change has prompted many workers to delay seeking medical care and preventive health services, which in turn can lead to more serious and costly illnesses.

SOURCES OF HEALTH INSURANCE

People under Age Sixty-five

For people under age sixty-five, there are two principal sources of health insurance coverage: private insurance (from employers or private policies) and Medicaid. From 1997 to 2005 the proportion of those covered by private insurance declined from 70.8% to 68.3%. (See Table 6.3.) During this time the percentage covered by public health plans grew (from 13.6% in 1997 to 17% in 2005) and the proportion of uninsured decreased slightly (from 17.4% in 1997 to 16% in 2005). (See Table 6.3 and Table 6.4.)

DeNavas-Walt, Proctor, and Lee report that the percentage of people covered by employment-based health insurance dropped from 60.4% in 2003 to 59.8% in 2004. (See Figure 6.1.) In contrast, during the 1980s, close to 70% of workers obtained private insurance through their employers. The decline is consistent with the continuing decline in all forms of private health coverage, which dropped from 68.6% in 2003 to 68.1% in 2004. Table 6.5 shows that for people under age sixty-five the overall decline in private health insurance coverage between 1997 and 2005 was just 2.5%, from 70.8% to 68.3%, but among people who were near poor the percentage covered by private insurance fell 11.1%, from 53.5% to 42.4%.

Three major factors contributed to the long-term decline in private health insurance. The first is the rising cost of health care, which frequently leads to greater cost sharing between employers and employees. Some workers simply cannot afford the higher premiums and co-payments (the share of medical bills the employee pays for each health service). A second factor is the shift in U.S. commerce from the goods-producing sector, where health benefits have traditionally been provided, to the service sector, where many employers do not offer health insurance.

According to the Employee Benefit Research Institute in "Sources of Health Insurance and Characteristics of the Uninsured" (February 1996, http://www.ebri.org/pdf/briefspdf/0296ib.pdf), a third factor is the changing nature of the relationship between employers and employees. In the past many companies took a paternalistic (fatherly) approach to employee welfare to promote a healthy workforce and foster employee loyalty. Since the mid-1990s, however, many companies have assumed less responsibility for their workers' health and have found that measures to cut health care costs effectively reduce business expenditures.

People Age Sixty-five and Over

There are three sources of health insurance for people age sixty-five and over: private insurance, Medicare, and Medicaid. Medicare is the federal government's primary health program for those sixty-five years old and older, and all people in this age group are eligible for certain basic benefits under Medicare. Medicaid is the government's program for the poor and people with disabilities. In 2004 a scant 0.8% of adults age sixty-five or older went without some type of health insurance. (See Table 6.1.)

Older adults may be covered by a combination of private health insurance and Medicare, or Medicare and Medicaid, depending on their income and level of disability. Almost all adults over age sixty-five are covered by Medicare. Thus, in 2003 the 62.7% of all adults age sixty-five or older who had private insurance were covered by a combination of their private insurance and Medicare. Nearly 35% obtained their private insurance through the workplace. Ten percent were covered by a Medicare health maintenance organization, and 8% were covered by Medicaid as well as Medicare. (See Table 6.6.)

In 2003 whites were far more likely to have both Medicare and private insurance (65.7%) than any other ethnic or racial group. Only 24% of Hispanics and 37.6% of African-Americans had both Medicare and private coverage. (See Table 6.6.)

MEDICARE C

Medicare C, also known as Medicare+Choice, became available to Medicare recipients on January 1, 1999. Medicare C came about as a result of the Balanced Budget Act of 1997 and was designed to supplement Medicare Parts A and B. Medicare C offers beneficiaries a wider variety of health plan options than previously available. These options include traditional (fee-for-service) Medicare, Medicare health maintenance organizations (HMOs), preferred provider organizations (PPOs), provider-sponsored organizations, and medical savings accounts (MSAs).

Medicare provider-sponsored organizations are organized and operate the same way that HMOs do. They are administered, however, by providers—physicians and hospitals. Medicare-preferred provider organizations are similar to HMOs but permit patients to see providers outside the network and do not require their members to choose a network primary care physician to coordinate their care. Patients in PPOs may seek care from any physician associated with the plan. Medicare private fee-for-service plans are more like traditional Medicare, except patients may pay more out-of-pocket expenses. MSAs have two parts: an insurance policy and a savings account. Medicare pays the insurance premium and deposits a fixed amount in an MSA each year to pay for an individual's health care.

CHANGING MEDICARE REIMBURSEMENT

Medicare reimbursement varies in different parts of the country, although everyone pays the same amount to

Medicare through taxes. As a result, older adults in some geographic regions have access to a more comprehensive range of services such as coverage for nursing home care and eyeglasses, while those in other areas do not receive these benefits.

Describing this practice as unfair and outdated, legislators called for more equitable reimbursement formulas in August 2002. U.S. Representative Leonard Boswell, a Democrat from Idaho, and Republican Congressman Tom Osborne from Nebraska introduced bipartisan

legislation to ensure that no state receives Medicare reimbursement greater than five percentage points above or below the national average. Still, in 2003, the most recent year for which data were available, thirty-five states, including Iowa, received less than average reimbursement while states with higher health care costs received above average reimbursement.

Medicare Prescription Drug, Improvement, and Modernization Act of 2003

On December 8, 2003, President George W. Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (PL 108-173) into law. Heralded as landmark legislation, the act provides older adults and people with disabilities with a prescription drug benefit, more choices, and improved benefits under Medicare. On June 1, 2004, seniors and people with disabilities began using their Medicare-approved drug discount cards to obtain savings on prescription medicines. Low-income beneficiaries qualified for $600 credit to help pay for their prescriptions. Besides providing coverage for prescription drugs, this legislation offers seniors the opportunity to choose the coverage and care that best meets their needs. For example, some older adults may opt for traditional Medicare coverage along with the new prescription benefit. Others may wish to obtain dental or eyeglass coverage or to enroll in managed care plans that reduce their out-of-pocket costs.

The legislation stipulated that beginning in 2005 all newly enrolled Medicare beneficiaries will be covered for a complete physical examination and other preventive services, such as blood tests to screen for diabetes. The new law also aimed to assist all Americans in paying out-of-pocket health costs by enabling the creation of health savings accounts, which allow Americans to set aside up to $4,500 every year, tax free, to save for medical expenses.

Will New Medicare Law Erode Retiree Benefits?

Robert Pear reports in "Medicare Law Is Seen Leading to Cuts in Drug Benefits for Retirees" (July 14, 2004, http://www.nytimes.com/2004/07/14/politics/14medicare.html?ex=1247457600&en=d6aecf347c871664&ei=5090&partner=rssuserland) that some health care industry observers and older adults feared that full implementation of Medicare prescription drug coverage in 2006 would prompt employers to sharply reduce or even entirely eliminate prescription drug benefits for as many as one-third of the nation's retirees with employer-sponsored drug coverage—about 3.8 million older adults. Pear notes that the new law, which from 2006 to 2013 will provide federal subsidies to encourage more employers to continue providing drug benefits, may actually further erode the level of benefits offered to retirees.

Pear states that according to the U.S. Department of Health and Human Services, the new law provides 7.6 million retirees with drug benefits through employer plans subsidized by the government, and 3.8 million will continue to receive their primary drug coverage from Medicare. This number is expected to swell to 4.1 million by 2010. Supporters of the new law and many employers contend that it will help stabilize retiree health benefits and support employers to continue providing drug coverage—satisfying the wishes of retirees, labor unions, and members of Congress from both parties.

To qualify for federal subsidies, which equal to 28% of drug costs from $250 to $5,000 a year per retiree, employers must demonstrate that their retiree drug benefits are as generous as those provided by Medicare. The subsidies will be tax free to employers, who can still take tax deductions for the cost of retiree health benefits. Detractors fear that if criteria for participation and compliance with federal rules and administrative regulations become too burdensome for employers, they will likely drop their retiree coverage, forcing retirees to rely on conventional Medicare including its standard prescription drug benefit, which is valued at about $1,200 per year.

Medicare Drug Plan Does Not Guarantee Savings

Jeffrey H. Birnbaum and Claudia Deane, in "Most Seniors Enrolled Say Drug Benefit Saves Money" (April 12, 2006, http://www.washingtonpost.com/wp-dyn/content/article/2006/04/11/AR2006041101685.html), report that by April 2006 approximately twenty-nine million older adults had enrolled in Medicare Part D—the prescription drug benefit—and another fourteen million were eligible for the benefit. A Washington Post-ABC News poll found that of the older adults who have enrolled in Part D, three-quarters felt the paperwork involved in enrollment was easy to complete, and nearly two-thirds said the drug benefit saved them money. The poll found that feelings about the benefit were divided along party lines—a majority of Republicans (56%) approved of it, and a similar majority of Democrats disapproved.

However, Valerie Reitman notes in "Medicare Drug Plans Often Not the Bargain Some Expect" (Los Angeles Times, April 18, 2006) that some older adults found that enrolling in Part D actually increased their prescription drug costs. These Medicare beneficiaries, who were largely in relatively good health and on few prescription medications, found that when premiums, co-payments, coverage gaps, and other costs were taken into account, the Medicare plans' drug prices were not competitive with the prices they could obtain at pharmacies that negotiate volume discounts and operate with low margins such as Drugtore.com, the Department of Veterans Affairs, and Costco, which prohibits markups of more than 15%. For example, a survey conducted by the Senior Action Network, a grassroots advocacy group, found that

more than half of the time Costco's prices on the top one hundred drugs used by Medicare beneficiaries were better than prices offered by all forty-eight Medicare drug plans in California. In "Riding the Rollercoaster: The Ups and Downs in Out-of-Pocket Spending under the Standard Medicare Drug Benefit" (July-August 2005, http://www.cmwf.org/publications/publications_show.htm?doc_id=283968), Bruce Stuart, Becky A. Briesacher, and Dennis G. Shea forecast that about 38% of enrollees would not realize savings from the new benefit in any given year.

CHILDREN

In 2005, 8.8% of children under the age of eighteen were uninsured at the time of the NHIS, 12.6% had been uninsured for part of the year preceding the interview, and 5.3% had been uninsured for more than a year. (See Table 6.2.) Among children under the age of eighteen, 13.6% of poor children and 39% of near-poor children were insured, compared with 85.5% of children who were not poor in 2005. (See Table 6.5.) Hispanic children were the most likely to be uninsured—21.1% in 2004—followed by 13% of African-American children and 9.4% of Asian children. Just 7.6% of non-Hispanic white children had no health care coverage, making them the least likely children to be uninsured in 2004. Older children, ages twelve through seventeen, were more likely to be uninsured (12.5%) than children under age twelve (10.1% of children under age six and 11% of those ages six to eleven were uninsured). (See Figure 6.5.)

TABLE 6.4

Percentage uninsured at time of interview under age 65, by age group and poverty status, 1997–September 2005 [continued]

^cBeginning in quarter 3 of 2004, two additional questions were added to the National Health Interview Survey (NHIS) insurance section to reduce potential errors in reporting of Medicare and Medicaid status. Persons aged 65 years and over not reporting Medicare coverage were asked explicitly about Medicare coverage, and persons aged under 65 years old with no reported coverage were asked explicitly about Medicaid coverage. Estimates of uninsurance for 2004 are calculated without using the additional information from these questions (noted as Method 1) and with the responses to these questions (noted as Method 2). Respondents who were reclassified as covered by the additional questions received the appropriate followup questions concerning periods of noncoverage for insured respondents. Beginning in 2005, all estimates are calculated using Method 2.

^dThese estimates were recalculated and may differ from those previously published. In 2004, a much larger than expected proportion of respondents reported a family income of "$2." Based on extensive review, these "$2" responses were coded to "not ascertained" for the final data files. For this report, a decision was made to re-run the 2004 estimates to reflect this editing decision.

source: Robin A. Cohen and Michael E. Martinez, "Table 4. Percentage Uninsured at the Time of Interview, for Persons under the Age of 65 Years, by Age Group and Poverty Status: United States, 1997–September 2005," in "Health Insurance Coverage: Estimates from the National Health Interview Survey, January-September 2005," in Early Release of Health Insurance Estimates Based on Data from the 2005 National Health Interview Survey, Centers for Disease Control and Prevention, National Center for Health Statistics, 2006, http://www.cdc.gov/nchs/data/nhis/earlyrelease/insur200603.pdf (accessed April 28, 2006)

In 2005, 61.9% of American children were insured under private health insurance plans, either privately purchased or obtained through the parents' workplace. Nearly one-third of American children (30.3%) were covered by public health coverage. (See Table 6.3.) According to the NHIS (March 2006, http://www.cdc.gov/nchs/data/nhis/earlyrelease/insur200603.pdf), from January through September 2005, 75.3% of poor children and 48.6% of near-poor children were covered by a public health plan at the time of the NHIS.

Some health care industry observers believed that the 1996 welfare reform law, the Personal Responsibility and Work Opportunity Reconciliation Act (PL 104-193), would reduce enrollment in Medicaid. Under the 1996 law, federal money once dispensed through the Aid to Families with Dependent Children program was now given as a block grant (a lump sum of money) to states. In addition, the law no longer required that children who received cash assistance to automatically enroll in the Medicaid program. The law gave states greater leeway in defining their requirements for aid, and in a few states some families were no longer eligible for Medicaid. Table 6.7 shows that enrollment in Medicaid has not declined, but has increased, from 21.1 million in 1998

to 30.9 million in 2003. The percentage of children covered by Medicaid also rose from 17.1% to 26%.

Some industry analysts attribute the declining proportion of uninsured children and children covered by Medicaid in the late 1990s to expansion of the State Children's Health Insurance Program, which targeted children from low-income families and was instituted

during the late 1990s. Others believe that the economic boom of the late 1990s may have played a role in preventing enrollment growth in Medicaid and have accurately predicted that the economic downturn and uncertainty of the early years of the twenty-first century would reverse the downward trend in both the share of the population without health insurance and Medicaid enrollment.

In 2005 and 2006 many health care advocacy groups, including the American Academy of Pediatrics, continued to agitate for federal legislation such as the MediKids Health Insurance Act (S.1303/HR3055) to provide health insurance for all children in the United States by 2012 regardless of family income level.

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996

On August 21, 1996, President Bill Clinton signed the Health Insurance Portability and Accountability Act (PL 104-191). Also known as the Kennedy-Kassebaum Act (after its sponsors, Senators Edward Kennedy and Nancy Kassebaum) or HIPAA, this legislation aimed to provide better portability (transfer) of employer-sponsored insurance from one job to another. HIPAA ensured that people who had employer-sponsored health coverage would be able to maintain their health insurance even if they lost their job or moved to a different company. They would, of course, have to continue to pay for their insurance. But they no longer had to fear that they would be denied coverage because of preexisting medical conditions, or

be forced to go without health insurance for prolonged waiting periods.

Industry observers and policy makers viewed HIPAA as an important first step in the federal initiative to significantly reduce the number of uninsured people in the United States. In addition to its portability provisions, HIPAA changed tax laws to make it easier for Americans to pay for medical care, and initiated a pilot program of medical savings accounts (MSAs) that would grow into a significant new initiative in paying for health care.

HEALTH SAVINGS ACCOUNTS

The Health Insurance Portability and Accountability Act of 1996 authorized a pilot program—a five-year demonstration project designed to test the concept of MSAs, which are similar to individual retirement accounts. Beginning on January 1, 1997, about 750,000 people with high-deductible health plans (high-deductible plans were defined as those that carried a deductible of $1,600 to $2,400 for an individual or $3,200 to $4,800 for families) could make tax-deductible contributions into interest-bearing savings accounts. The funds deposited into these accounts could be used to purchase health insurance policies and pay co-payments and deductibles. People using MSAs could also deduct any employer contributions into the accounts as tax-deductible income. Any unspent money remaining in the MSA at the end of the year is carried over to the next year, thereby allowing the account to grow.

To be eligible to create an MSA, individuals must be less than sixty-five years old, self-employed, and uninsured or must work in firms with fifty or fewer employees that do not offer health care coverage. Withdrawals to cover

out-of-pocket medical expenses are tax free and the money invested grows on a tax-deferred basis. Using MSA funds for any purpose unrelated to medical care or disability results in a 15% penalty. However, when MSA users reach age sixty-five the money may be withdrawn for any purpose and is taxed at the same rate as ordinary income.

Supporters of MSAs believed that consumers would be less likely to seek unnecessary or duplicative medical care if they knew they could keep the money left in their accounts for themselves at the end of the year. Experience demonstrates that MSAs can simultaneously help to contain health care costs, allow consumers greater control and freedom of choice of health care providers, enable consumers to save for future medical and long-term care expenses, and improve access to medical care.

In February 2001 President George W. Bush advocated more liberal rules governing MSAs and proposed making them permanently available to all eligible Americans. Congress reviewed the president's proposed reforms and during its 2001–02 session lowered the minimum annual deductible to increase the number of eligible Americans, allowed annual MSA contributions up to 65% of the maximum deductible for individuals and 75% for families, and extended the availability of MSAs through December 31, 2003.

The Medicare Modernization Act of 2003 included provisions to establish health savings accounts (HSAs) for the general population. Like the MSA program it replaced, HSA accounts offer a variety of benefits, including more choice, greater control, and individual ownership. Specific features of HSAs include:

• Permanence and portability
• Availability to all individuals with a qualified high-deductible plan
• Minimum deductible of $1,000 per individual plan and $2,000 per family plan
• Allowing annual contributions to equal 100% of the deductible
• Allowing both employer and employee contributions
• Not placing a cap on taxpayer participation
• Allowing tax-free rollover of up to $500 in unspent flexible spending accounts

Pros and Cons of Health Savings Accounts

The number of Americans that enrolled in HSAs grew threefold between March 2005 and February 2006. However, Julie Rovner reports in "Bush Makes Push for Health Care Savings Plans" (January 31, 2006, http://www.npr.org/templates/story/story.php?storyId=5179309) that surveys, including opinion polls performed for the Henry J. Kaiser Family Foundation, reveal that most Americans remain wary about HSAs and prefer traditional insurance, while a sizable proportion of healthy, wealthy people favor HSAs. HSA enrollees who do not get sick and do not use the funds in their accounts can realize substantial cost savings—cutting their insurance bills by as much as half compared with traditional coverage. In addition, money invested in the HSA that is not used is rolled over each year, so, according to Rovner's article, "if you start an HSA early enough, and are relatively healthy, you could see savings in the triple digits by retirement."

In Consumer-Directed Health Plans: Small but Growing Enrollment Fueled by Rising Cost of Health Care Coverage (April 2006, http://www.gao.gov/new.items/d06514.pdf), the U.S. Government Accountability Office (GAO) confirms that the number of U.S. residents enrolled in consumer-directed health plans combined with HSAs accounted for a small but growing share of the 177 million Americans with private health insurance—growing from three million to six million between January 2005 and January 2006. The report also finds that the number of employers offering high-deductible insurance plans to workers increased from 1% in 2004 to about 4% in 2005. The report attributes the rise in growth and popularity of consumer-directed plans to the rising cost of health care coverage.

Advocates of HSAs include not only President Bush but also the American Health Insurance Plans, an industry trade association. They believe that by having consumers assume an increasing burden of escalating medical care costs, HSAs will stimulate comparison shopping for health care providers and services and competition that will ultimately reduce the rate at which costs are rising.

Detractors cite Cheryl Damberg's Consumer-Directed Health Plans: Research on Implications for Health Care Quality and Cost (September 2005, http://www.rand.org/pubs/testimonies/2005/RAND_CT249.pdf), a RAND Corporation study, which finds that increasing out-of-pocket expenses did reduce health care spending but also deterred people from obtaining preventive care such as blood pressure screening and Pap smears. Damberg's study observes that consumers with lower incomes who paid for more of their care out of pocket suffered health consequences, such as poorer control of blood pressure and sharply diminished use of preventive health services.

As reported by Eric Sabo in "A Million Little Health Savings Accounts" (February 1, 2006, http://globalrph.healthology.com/focus_article.asp?b=globalrph&f=healthcare&c=healthcare_savings-accounts&spg=FI), Uwe Reinhardt, a respected health economist, believes that HSAs will not solve the problems of the U.S. health care system. To date, shifting more expenses to consumers has neither reduced medical costs, nor has it reduced the numbers of uninsured Americans. HSAs will not help the poor or near poor, which means that county hospitals, emergency departments, and the government will have to underwrite their care. Even John F. Cogan, R. Glenn Hubbard, and Daniel P. Kessler, who originally promoted HSAs as a means of empowering consumers to reduce medical care costs, predicted in Healthy, Wealthy, and Wise: Five Steps to a Better Health Care System (2005) that the accounts would cover an additional twenty million Americans, less than half of the forty-five million Americans uninsured in 2006.

HEALTH INSURANCE COSTS CONTINUE TO SKYROCKET

According to Annual Employer Health Benefit Survey (September 2005, http://www.kff.org/insurance/7148/upload/2004-Employer-Health-Benefits-Survey-Full-Report.pdf),

a survey conducted by the Henry J. Kaiser Family Foundation and the Health Research and Educational Trust, 2005 health insurance premiums continued to increase much faster than inflation and wages. The rate of growth of private health insurance premiums slowed to 9.2% in 2005, declining for the second consecutive year. Premiums averaged $4,024 for individual coverage and $9,068 for family coverage. At close to $11,000 per year, health insurance premiums for a family of four are about equal to the earnings of a minimum-wage worker. Workers paid an average of $610 per year toward the premium for individual coverage and $2,713 per year toward the premium for family coverage.

The survey finds that more than half of covered workers incur a separate deductible, co-payment, or coinsurance for each hospital admission. Deductibles and co-payments averaged about $241 per admission. The overwhelming majority of covered workers incur copayments for office visits and prescription drugs. Nearly half (44%) of workers are enrolled in plans with a $20 or $25 drug co-payment.

The increase was attributed to larger insurance claims resulting from higher prices for hospital care and prescription drugs, coupled with increasing consumer demand for, and utilization of, health care services. The survey reports that many employers, particularly large employers with two hundred or more workers, said they would likely have to increase the amounts their employees must pay for heath care coverage in 2006, and some employers said they would likely offer workers a high deductible plan (a plan with a deductible of at least $1,000 for individual coverage and $2,000 for family coverage) the following year. Twenty percent of firms, mostly those with five thousand or more employees, are already offering high deductible plans. As reported by surveys from previous years, employers remain extremely concerned about continuing increases in health care costs, with more than half of those surveyed identifying health insurance as the greatest concern for the company.

According to the survey, from 2000 to 2005 the cost of health insurance premiums increased by 73%, compared with overall inflation of 14% and wage growth of 15%. During the same period, the percentage of employers offering health benefits dropped from 69% to 60%, with most of the decline among smaller companies that employ from one to 199 workers. The researchers and other industry analysts observe that if there is no relief from premium increases soon, despite employers' stated reluctance to drop employee health care coverage, many may stop offering health benefits to their employees and some workers may be forced to drop their coverage because they are unable to contribute their share of the costs. Industry observers and policy makers fear that rising insurance premiums will swell the ranks of Americans without insurance coverage.

HEALTH INSURANCE COMPANIES HAVE FEW COMPETITORS IN MANY U.S. REGIONS

As reported by California Healthline in "Health Insurers Have Near-Monopolies in Many U.S. Markets" (April 18, 2006, http://www.californiahealthline.org/index.cfm?Action=dspItem&itemID=120539&ClassCD=CL109), the American Medical Association (AMA) conducted a 2006 study that revealed that as a result of consolidation and more than four hundred mergers between 1996 and 2006, health insurers have near monopolies and oligarchies (ruled by the few, small, exclusive groups) in most U.S. markets. The study finds that 56% of the 294 metropolitan areas examined had single insurers that controlled more than 50% of HMO and PPO business. Some insurers were even more dominant, such as Blue Cross and Blue Shield of Alabama, which controlled more than 90% of the market in many parts of the state. Some industry observers, including James Rohack, a former president of the AMA board of trustees, said, "Each time we've seen consolidation, premiums have gone up, and choice has gone down." Others, such as David Colby, the chief financial officer of WellPoint, a major insurer, argued that rising medical costs forced his company to raise its premiums, and Christopher Ohman, the chief executive officer of the California Association of Health Plans, attributed rising premiums to escalating health care costs rather than consolidation.

As reported by Robert Pear in "Loss of Competition Is Seen in Health Insurance Industry" (April 30, 2006, http://www.nytimes.com/2006/04/30/us/30insure.html?ex=1154750400&en=ffe296afebeb3e5c&ei=5070), an investigation conducted by the GAO noted similar findings—that a few insurers account for an increasing proportion of health insurance policies sold to small employers in most states. The GAO found that in nine states, the largest insurer, Blue Cross and Blue Shield, had more than 50% of the market. As small health plans lose market share to larger plans, consumers have fewer choices and higher premiums.

MENTAL HEALTH PARITY

In terms of mental health care, parity refers to the premise that the same range and scope of insurance benefits available for other illnesses should be provided for people with mental illness. Historically, private health insurance plans have provided less coverage for mental illness than for other medical conditions. Coverage for mental health was more restricted and often involved more cost sharing—higher co-payments and deductibles—than coverage for medical care. As a result, many patients with severe mental illness, who frequently required hospitalizations and other treatment, quickly depleted their mental health coverage.

During the 1990s there was growing interest in parity of mental health with other health services. The Mental Health Parity Act of 1996 sought to bring mental health benefits closer to other health benefits. The act amended the 1974 Employee Retirement Income Security Act and the 1944 Public Health Service Act by requiring parity for annual and lifetime dollar limits but did not place restrictions on other plan features such as hospital and office visit limits. It also imposed federal standards on the mental health coverage offered by employers through group health plans. By 2006 thirty-four state laws governing mental health parity were more comprehensive in scope than the federal legislation, and one-third of the states required full parity.

Costs of Parity

Critics of the parity legislation expressed concern that the law would sharply increase costs. However, several studies, including those performed by the U.S. Congressional Budget Office, and projections made by private actuarial and accounting firms forecast cost increases of about 1% for parity in terms of dollar

limits. Full parity for mental health and substance abuse was estimated to increase costs by 2.5-3.9% in 2000. (See Table 6.8.)

Research conducted before the implementation of parity legislation estimated that the cost of providing the same level of outpatient mental health care would be about twice as much as for general medical care. As a result of these estimates, traditional indemnity (fee-for-service) insurers projected that providing insurance pro tection against the risks of mental illness would be substantially more costly than for other medical problems. Insurers also feared "adverse selection"—that plans with comprehensive mental health benefits would attract a disproportionate number of people with severe mental illness who would be costly to treat. Similarly, in the absence of mandated minimum mental health benefits, insurers could offer poor mental health benefits to deter people in need of treatment from enrolling in their plans.

Managed care plans may be as compelled as indemnity insurers to discourage people with potentially costly illnesses from enrolling in their plans; however, they have different utilization and cost controls than indemnity insurers. Rather than reducing demand for services by increasing cost sharing, managed care regulates treatment decision making. For example, managed care plans may direct consumers to outpatient services as opposed to inpatient services or to peer counseling programs instead of mental health professionals. By controlling treatment and related services, managed care plans are able to extend coverage and benefits to more people at little or no additional cost.

The report Insurance Parity for Mental Health: Cost, Access, and Quality (June 2000, http://www.nimh.nih.gov/publicat/nimhparity.pdf), which was prepared by Ruth L. Kirschstein for the National Advisory Mental Health Council (NAMHC), considers the effects of parity on costs, utilization, and access for employers with more than 150,000 employees. The four-year study that began one year before parity went into effect finds that by the third year of parity the proportion of people receiving mental health services grew from less than 5% to more than 7% and costs were reduced by one-half. The cost reductions were attributed to substantial declines in inpatient utilization, reduced lengths of stay, lower per diem (by the day) costs, and lower costs for mental health care for children and adolescents.

Access to Care under Parity

The NAMHC report asserts that parity does not necessarily improve access to mental health care because managed care and behavioral health plans control access and counter some of the gains made as a result of parity. Managed behavioral health "carve-out" arrangements appear to influence access by offering more people access to basic mental health care than what is available through traditional fee-for-service practice. To offset the costs of this increased access, these plans generally reduce the intensity of more costly services, primarily inpatient treatment and long-term psychotherapy.

PARITY MAY NOT SOLVE ALL ACCESS PROBLEMS

According to Richard Frank, Howard Goldman, and Thomas McGuire in "Will Parity in Coverage Result in Better Mental Health Care?" (New England Journal of Medicine, December 6, 2001), parity alone will not eliminate all obstacles to gaining access to mental health care. They opine that most private insurance does not cover vital components of effective mental health services. For example, private insurance does not usually cover day-hospital programs, case management, psychosocial rehabilitation, or residential treatment, nor does it cover services such as supervised housing or supported employment. Frank, Goldman, and McGuire contend that true parity would require an expanded concept of health insurance and would necessitate coverage of all services deemed necessary for optimally effective mental health care.

Effects of Federal Mental Health Parity Legislation on Employers

In Mental Health Parity Act: Despite New Federal Standard, Mental Health Benefits Remain Limited (May 2000, http://www.gao.gov/archive/2000/he00095.pdf), the GAO determines the extent to which employers had complied with the requirements of the Mental Health Parity Act of 1996, the act's effect on the cost of health insurance claims, and the actions federal agencies had taken to assure compliance with the act.

The survey finds that 86% of employers said their health plans were consistent with federal parity requirements and that annual and lifetime dollar limits for mental health benefits were comparable to medical and surgical benefits. Just four years earlier, before the parity legislation was enacted, a survey found that 55% of employers reported mental health benefit parity in terms of dollar limits.

Although the survey finds that most employers' plans offered parity in dollar limits for mental health coverage, 87% continued to restrict mental health benefits more than medical and surgical benefits. Two-thirds limited the number of outpatient office visits and hospital days for mental health treatment to less than those offered for other medical treatment. To compensate for the increased dollar limits offered as a result of the legislative requirement, many employers chose to limit at least one other mental health benefit. For example, some employers reduced the numbers of covered hospital days or outpatient visits or instituted greater cost sharing for mental health benefits.

Contrary to employers' fears that compliance with the act would sharply increase their plans' claims costs, the survey finds that only 3% of employers reported increased costs in response to compliance with the parity requirement. Interestingly, about 60% of the employers surveyed said they did not know if their plans' claims costs had changed because they had complied with the terms of the act, and less than 1% opted to drop their health coverage altogether or cease to offer mental health coverage since the law was enacted.

Most employers felt that changes they had made to comply with the parity legislation had not affected their employees' access to mental health services nor had it affected employee eligibility for coverage.

Federal agency management of the parity law was discovered to vary from a relatively lax complaint-oriented approach to oversight to the more stringent use of random investigations to assess compliance with the parity law. Failure to comply may be costly—health plans may be fined as much as $100 per day per violation for each individual affected by the insurance carrier's noncompliance.

Howard H. Goldman et al., in "Behavioral Health Insurance Parity for Federal Employees" (New England Journal of Medicine, March 30, 2006), confirm that costs are not likely to increase when workers are given the same coverage for mental health and substance abuse treatment as they have for other medical care. Goldman et al.'s study considers seven Federal Employees Health Benefits plans that offered mental health and substance abuse benefits on a par with medical benefits beginning in January 2001. Among people who used mental health services, spending attributable to parity decreased significantly for three plans and did not change significantly for four other plans. The institution of parity was also associated with significant reductions in out-of-pocket spending in five of seven plans. The investigators conclude that offering parity "can improve insurance protection without increasing total costs."