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"FREE-RIDER"
EFFECT IN HEALTH INSURANCE
Boosting
employer healthcare costs
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By
Brian R. Hook
While the proportion of families with dual-income earners has
increased over the past few decades, the share of employers
offering health insurance continues to decline, putting pressure
on the employers that continue to offer health-insurance benefits.
Employers providing health insurance to their employees’ working
spouses are assuming additional costs of more than $46 billion
nationally and $891 million in Missouri in 2006, according to
a report by the Missouri Foundation for Health.
The St. Louis-based non-governmental foundation, which has issued
more than $200 million in grants and awards in the last five
years, wanted to measure the impact of this phenomenon—often
referred to as “free-riders,” because employees are receiving
health insurance from another source—on the business community
across the state.
The foundation commissioned Kenneth Thorpe, professor and chair
of the department of health policy and management at Emory University
in Atlanta, to research this free-rider effect and to prepare
a research report, titled “Health Insurance Coverage of Dual-Income
Families, the Free-Rider Effect and the Cost to Employers.”
“Essentially, the study demonstrates the effect of many businesses—mainly
smaller businesses—being priced out of the market and no longer
being able to afford to provide health insurance to their employees,”
says Leslie Reed, vice president for health policy at the non-profit
foundation. “The Thorpe research clearly illustrates that other
businesses—mainly bigger businesses—are carrying a disproportionate
burden.”
“The study describes the major disparities in our system of
employer-sponsored health-insurance coverage, and gives strong
indication that there are real consequences if these disparities
continue unaddressed. Smaller firms are having more and more
difficulty providing insurance to their employees due to increasing
costs,” Reed says.
“As a direct result, businesses able to provide insurance to
their employees and their employees’ spouses face significant
challenges. Expenses go up as health- insurance costs increase
and the number of people absorbed into their plans grows. These
employers may be forced to cut jobs or cut back on the health
insurance.”
Reed says the results of the study are surprising. “We did not
realize how costly this poorly distributed employer sponsored
health-insurance system had become in Missouri. The $891 million
annual price tag exceeded our expectations,” Reed says.
“The Missouri Foundation for Health believes there is a need
for a more equitable method for distributing costs and benefits
within the employer-sponsored-insurance system. We hope this
study prompts businesses, legislators, and other policy makers
to recognize these disparities and work to develop broader system
solutions.”
In St. Louis, 71 percent of residents are covered by employer-sponsored
insurance compared to an average of 61 percent nationally, according
to the research. However, in small St. Louis companies the percentage
is lower at 64 percent. Plus the coverage rate for low-income
workers is declining, from 40 percent in 2000 to 26 percent
in 2004.
“Some of the country’s best health resources are available in
St. Louis. The two medical schools and the large community hospitals
here have the capability of providing the most sophisticated
medical care available anywhere in the U.S.,” Reed says.
“However, many working residents are on the outside looking
in at these world class resources because they lack financial
means to access care. Add to these the poor and those unable
to work, and St. Louis is experiencing a major access problem
for many of its residents. It is not enough for health services
to be available in a community; they must also be accessible
to all of the community’s residents in need.”
| Reed
says the report builds on existing knowledge to offer significant
new insights into employer sponsored insurance coverage,
including: |
| The
decline in the percentage of individuals covered by employers
has continued over the last five years, falling from 59
percent to just 53 percent. |
| In
2006, employers providing health insurance to their employees’
working spouses assumed additional health-care costs of
more than $46 billion nationally and $891 million in Missouri.
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| Nationally,
there were nearly 31 million families where both adults
were employed in 2006. In Missouri, almost 682,000 families
were dual-income. |
| The
incremental cost to employers covering a worker from a free-riding
firm is $2,713 per employee across the country and $2,564
in Missouri when both workers are covered under a spouse’s
policy. |
| Of
these dual-income families, 55 percent across the country
and 51 percent in Missouri have employer-sponsored coverage
through a spouse’s policy. |
| Both
nationally and in Missouri, free-riding employers are most
prevalent among the smallest firms—those with fewer than
10 employees. The concentration of free-riding employers
decreases as firm size increases. |
| Large
employers are carrying extra health insurance costs because
many small employers have either been priced out of the
health insurance system or cannot offer coverage at similarly
affordable rates as large employers. |
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