Introduction and summary
Health insurance is one of the main benefits employees look for when considering a firm’s compensation package.1 Offering robust health insurance is an important recruitment and retention tool for employers, especially considering the high level of employee attrition in 2021 and 2022.2 In 2020, 163 million nonelderly Americans, or 60 percent of the nonelderly population, were covered by employer-sponsored insurance (ESI).3 While the majority of employees (63 percent) report being extremely or very satisfied with their coverage,4 many people with private coverage say that costs have prevented them from seeking needed medical care or making financial decisions to account for the rising costs that put individuals and families in a worse position, such as taking on additional credit card debt or reducing contribution to retirement savings to cover premiums.5 A 2019 Kaiser Family Foundation and Los Angeles Times survey found that 2 in 5 adults covered by ESI reported difficulty affording medical care, prescription drugs, or premiums.6
Over the past decade, ESI premiums have risen above the rate of inflation and have outpaced wage growth.7 The rising price of health care, rather an increase in utilization, is responsible for approximately two-thirds of per-person medical and pharmacy claims spending growth between 2015 and 2019.8 On average, private insurance plans pay 224 percent of Medicare rates for hospital inpatient and outpatient services.9 These high prices result in higher insurance costs, with premiums and deductibles for ESI rising at firms of all sizes.10 As provider markets become more concentrated, even very large employers and the insurance plans negotiating on their behalf lack sufficient market power to obtain fair prices from health systems in many markets.11
In addition to representing an ever-increasing cost for firms, rising premiums also put financial strain on employees. Since 2010, the share of premiums that employees bear has remained relatively constant, around 20 percent for single coverage and 32 percent for family coverage.12 Moreover, the burden tends to be greater for lower-income workers: Firms with a greater number of low-wage employees on average contribute 10 percent less toward single coverage premiums and 13 percent less to family coverage premiums than those with fewer low-wage employees.13 As premiums rise, the cost of health insurance grows as a share of total compensation, cutting into employees’ take-home pay.14 (see Figure 1)
Figure 1
A growing proportion of ESI plans require beneficiaries to pay a deductible, and the average deductible is rising.15 In part, this increase is driven by employers increasingly offering high-deductible health plans (HDHPs) over the past two decades, and employer contributions toward health savings accounts (HSAs) have fallen over the past few years.16 There is growing concern among employers that employees are already bearing the maximum share of health costs they can afford.17 It is thus no surprise that in a 2022 survey conducted by The Commonwealth Fund, 68 percent of Democratic voters, 55 percent of independent voters, and 46 percent of Republican voters responded that lowering the cost of health care needed to be a top health priority for Congress and the Biden administration.18
Amid concerns about the growing costs of health insurance, policymakers are beginning to take action. Several states have established cost commissions with authority to monitor and regulate the cost of care across both public and private insurance.19 Federal lawmakers have considered legislation to eliminate provider-insurer contract clauses that help sustain high prices for care.20 With the challenges employers face in containing rising prices in ESI, many business leaders believe the cost is not sustainable.21
This report discusses the trends in the availability and affordability of ESI over the past decade and the drivers of the cost of coverage. A previous report in this series examined coalitions that are working to reduce the price of health coverage and improve the quality of care. Forthcoming reports will lay out policy proposals to combat rising costs and ensure that workers have affordable, comprehensive coverage.
Read more on employer-sponsored health insurance costs in the previous report in this series
Employees report satisfaction with ESI but also concerns about cost
ESI is by far the largest segment of health insurance coverage in the United States, covering workers and their dependents as well as retirees. U.S. Census Bureau data show that 48.5 percent of the total population in 2021 had job-based coverage as their primary health insurance.22 (see Figure 2) Employers offer ESI as part of workers’ compensation package, with workers bearing responsibility for some portion the premium. In 2022, the average employer premium contribution was 80 percent for single coverage and 67 percent for family coverage.23
One major factor that drove ESI to prominence in the U.S. health care system was World War II-era laws that excepted health insurance from wartime wage controls, enabling unions to improve worker compensation though health insurance benefits.24 The endurance of ESI is bolstered by the tax exemption for health insurance premiums: Employer contributions toward premiums are exempt from income and payroll taxes, and employee contributions are generally income tax exempt.25
Even prior to implementation of the Affordable Care Act’s (ACA) standards on coverage of essential health benefits26 and “minimum value,”27 ESI plans tended to be relatively generous. A 2010 study found that the average actuarial value (AV)—the percentage of total average costs for covered benefits that a plan will cover28—of employer coverage was 83 percent, compared with 60 percent AV for plans in the individual market.29 Another study, in 2011, found that only about 2 percent of people covered by ESI had plans with value below 60 percent AV—equivalent to lowest-value metal tier, or bronze, coverage in the ACA marketplaces.30 The vast majority of ESI enrollees were in plans with an AV at or above 80 percent, which is gold tier in the marketplaces.
Workers place high value on ESI: In a 2018 survey by America’s Health Insurance Plans, more than half (56 percent) of respondents said quality insurance coverage was a deciding factor to stay at their job.31 Because sponsoring health insurance is critical for employee recruitment and retention, employers are understandably concerned about their ability to manage the cost.32
Figure 2
Among employees who enroll in their employer’s plan, the majority are satisfied with the coverage they receive. In a 2021 poll by the Employee Benefit Research Institute, 63 percent of respondents reported being “extremely or very satisfied” with their employer-based plan.33 However, an analysis by The Commonwealth Fund found that nearly 1 in 3 people (29 percent) covered by ESI in 2022 were underinsured, meaning that the cost sharing in their plan was unaffordable.34 Moreover, because employees’ premium contributions within a firm usually do not vary by income—in contrast to ACA health insurance marketplace coverage, which offers income-based subsidies—lower-paid workers typically owe a greater share of their income toward health coverage.35 While an ESI offer does not preclude eligibility for Medicaid or Children’s Health Insurance Coverage (CHIP), people with an ESI offer whose employee contribution is considered “affordable” by the ACA’s standard are not eligible for health insurance marketplace subsidies.36
Coverage that is unaffordable or insufficient can harm enrollees’ physical, as well as financial, health.
Coverage that is unaffordable or insufficient can harm enrollees’ physical, as well as financial, health. A 2019 survey conducted by the Kaiser Family Foundation and the Los Angeles Times found that 33 percent of people with ESI “put off or postponed” needed care due to cost, and 18 percent did not fill prescriptions, rationed doses, or skipped doses of medicine.37 More than one-quarter (27 percent) of respondents also reported problems with paying medical bills, and those who reported problems with the affordability of care or coverage had taken measures such as cutting back on other spending, taking on more credit card debt, using up savings, borrowing from friends or family, or taking out loans.38
Glossary
Cost sharing: Costs for covered health care services that the enrollee pays out of their own pocket. It generally includes deductibles, coinsurance, and copayments but not premiums.
Deductible: The amount an enrollee pays for covered health care services before the insurance plan starts to pay.
Fully insured plan: A plan where the employer contracts with another organization to assume financial responsibility for the enrollees’ medical claims and for all incurred administrative costs.
Premium: The amount paid on a regular basis—usually monthly—for enrollment in a health insurance plan. In employer-sponsored coverage, some portion of the premium is typically paid by the employer, and the other portion is paid by the employee.
Self-insured plan: A plan offered by an employer that directly assumes the major cost of health insurance for its employees. Self-insured employers bear the entire risk or can insure against large claims by purchasing stop-loss coverage. Some self-insured employers contract with insurance carriers or third-party administrators for claims processing and other administrative services; other self-insured plans are self-administered.
Sources: U.S. Bureau of Labor Statistics, “Definitions of Health Insurance Terms”; HealthCare.gov, “Glossary.”39
Eligibility and uptake rates have remained largely the same over the past decade
Over the past decade, there has been little change in how many employers offer insurance to their employees.40 According to Kaiser Family Foundation’s 2022 Employer Health Benefits Survey, approximately 89 percent of workers are employed by a firm that offers health insurance, a 2 percent decrease from 2010.41 Larger firms are more likely to offer ESI than smaller ones.42 (see Figure 3) Nearly all firms (99 percent) with 200 or more employees offer ESI to at least some of their employees, while only about half (39 percent) of firms with three to nine employees offer coverage.43
Figure 3
Similarly, employee eligibility and uptake of ESI have remained largely unchanged over the past decade.44 As of 2022, 58 percent of all small-firm employees and 61 percent of all large-firm employees are covered by their own employer’s ESI plan.45 Employers offering ESI typically limit eligibility to full-time employees. In 2022, 78 percent of workers were eligible for health insurance through their employer. As of 2022, a slightly higher share (79 percent) of employees were eligible on average for coverage at small employers (three to 199 employees) than at large employers (200 or more employees), at 78 percent.46
Reasons eligible employees may choose not to enroll in their employer’s plan include lack of affordability, coverage available through a spouse’s or parent’s employer, or eligibility for public coverage such as Medicaid or Medicare.47 Among ESI-eligible employees in 2022, 77 percent chose to enroll.48 Among those eligible for ESI, employees of large employers are slightly more likely (78 percent) to enroll in their employer’s insurance plans than those of smaller ones (73 percent).49 Uptake rates also vary by employee wage level and age.50 In firms with a large number of low-wage workers (making $30,000 or less annually), uptake was 71 percent in 2022, compared with 82 percent in firms with a large number of high-wage workers (making more than $70,000 annually).51 Additionally, older employees are more likely than younger employees to enroll: Firms with a large share (35 percent or more) of workers ages 50 years and older had enrollment rates of 80 percent, while firms with younger workers (at least 35 percent 26 years and younger) had enrollment of 69 percent.52
Enrollment among the 4 major plan types has stabilized since 2016
Plan type is one of the primary tools that employers use to rein in costs. Four common types are: health maintenance organization (HMO) plans, point of service (POS) plans, preferred provider organization (PPO) plans, and high-deductible health plans. Each of these plan designs takes a different approach to cost containment and access to care. In addition, within any plan design, employers may opt to offer more restrictive provider networks to direct enrollees to lower-cost or higher-quality care.
An HMO typically offers lower costs for premiums, deductibles, and other cost sharing, which it achieves through a more restrictive provider network.53 Typically, an HMO requires subscribers to receive care from in-network providers and will only pay for care from out-of-network providers in the event of an emergency.54 POS plans require that care be coordinated through a primary care provider but provide coverage for out-of-network providers with a referral while still incentivizing enrollees to use in-network providers by offering lower cost sharing for in-network providers.55
PPOs held the dominant position in the ESI market prior to the advent of HDHPs in the mid-2000s.56 PPOs offered patients a network of providers available at reduced rates while still affording them more affordable coverage for out-of-network care when needed, without a referral.57 However, this freedom came with the highest premiums of any plan type, and PPOs have lost ground to HDHPs, which offer lower monthly premiums in exchange for higher deductibles.58 Between 2010 and 2022, PPOs went from 58 percent of the ESI market to 49 percent, while HDHPs jumped from 13 percent to 29 percent.59 HDHPs’ increase in market share stalled in 2016, and they captured approximately 30 percent of ESI enrollment from 2016 to 2022.60 During this time, HMOs accounted for 16 percent to 19 percent, and POS plans represented 7 percent to 10 percent of the market.61 (see Figure 4)
Figure 4
The defining feature of HDHPs, as the name suggests, is a large deductible, and an HDHP is typically accompanied by an HSA that allows the enrollee to set aside a portion of their wages in a tax-free account that can be used for medical expenses.62 For 2022, the IRS minimum deductible for an HSA-qualifying HDHP is $1,400 for single coverage, and it will increase to $1,500 in 2023.63 In theory, HDHPs, which are sometimes referred to as consumer-driven health plans, incentivize enrollees to shop for lower prices for care, reducing premiums for both employers and employees.64 This plan design is most attractive to enrollees who anticipate either having little to no health care needs or having health expenditures well beyond the deductible.
The trade-off of lower premiums is that HDHP deductibles can be in the thousands of dollars, discouraging enrollees from seeking care due to cost before the plan benefits fully kick in. A study by researchers at the Texas A&M University School of Public Health found that HDHP enrollees earning less than $75,000 are most likely to avoid care and that the care most often avoided is low-cost primary care.65 These individuals showed significantly higher utilization of preventable and avoidable emergency department visits than their higher-wage counterparts.66 The study authors speculate that low-income individuals have greater difficulty meeting their deductible and affording primary or maintenance care.67 Other research shows that HDHP enrollees’ care avoidance often extends to preventive services available to the patient at no cost under the ACA.68
Firms of all sizes are feeling the weight of rising premiums
Health care has been one of the fastest-growing segments of the economy,69 rising from $2.6 trillion in 2010 to $4.1 trillion in 2020—at which point it represented nearly 20 percent of U.S. gross domestic product.70 Premiums for ESI have also risen steadily for both individual and family coverage. According to the 2022 Kaiser Family Foundation Employer Health Benefits Survey, individual coverage premiums rose 58 percent, from an average of $5,049 annually in 2010 to $7,911 in 2022.71 Over the same period, family coverage premiums rose more than 63 percent, from $13,770 to $22,463.72 Put another way, the annual premium for individual coverage has risen more than $225 per year on average, and family coverage has risen more than $700 per year on average from 2010 to 2022.73
The annual premium for individual coverage has risen more than $225 per year on average, and family coverage has risen more than $700 per year on average from 2010 to 2022.
While premiums continue to rise at firms of all sizes,74 employees working for larger firms on average pay a smaller share of the total premium. Data from the U.S. Bureau of Labor Statistics show that in 2022, the median monthly premium contribution for family coverage at a firm employing more than 500 people was $446, while the amount for an employee at a firm employing 100 to 499 people was $466, and $538 for an employee at a firm with fewer than 100 people.75 Employee contributions toward single coverage in 2022 show a similar pattern by firm size.
Among the tactics that employers can use to address rising premiums, besides switching the type of plans offered, are self-funding their insurance plan and modifying plan benefit design to shift costs from premiums to out of pocket.
Self-funded vs. fully funded ESI plans
Employers can attempt to gain greater control over health insurance costs by self-funding their plan. A firm with a fully insured plans contracts with the insurance company that bears the financial risk. In contrast, firms that self-insure bear the claims risk themselves and purchase only administrative services from a third-party administrator, typically an insurance carrier.76 While self-funding gives firms greater control over benefits offered, it can be more difficult for small or medium firms because of the liquid capital needed to comfortably self-insure.77 In some instances, self-insuring firms will purchase reinsurance or stop-loss insurance for protection against claims above a certain threshold.
Another major difference between fully insured and self-funded plans is how they are regulated. Most issues of insurance are regulated at the state level, typically by state insurance commissions.78 However, self-funded health insurance plans were exempted from these state regulations by the Employee Retirement Income Security Act (ERISA).79 Passed in 1974, Section 514 of ERISA preempts state authority to regulate self-funded health plans.80 As such, regulation of self-funded plans is controlled by the U.S. Department of Labor.81
While one might expect self-funded firms to have greater control over costs, average annual premiums for fully insured and self-funded plans have risen over the past five years, at 13 percent and 18 percent, respectively.82 An additional concern for self-insured plans is whether the plan’s third-party administrator will actually act in the best interest of the sponsoring firm. In most instances, the employer funds the plan but does not actively participate in negotiations with providers. Instead, the third-party administrator negotiates with providers and then offers plan packages to the self-insuring employer.83 Third-party administrators are typically paid a percentage of the total claims processed or on a per-member, per-month basis, both of which create a disincentive for the third-party administrator to reduce costs.84
Even large employers can struggle to secure lower prices for health coverage.85 A study by researchers at the Johns Hopkins Bloomberg School of Public Health and the Johns Hopkins Carey School of Business found that large firms operating in metropolitan statistical areas did not have sufficient market power to match providers due the concentration among providers.86 The study authors suggest that to achieve the necessary market power to negotiate lower rates, employers should either shift to fully insured plan models to incentivize insurance companies to negotiate more zealously by placing the financial risk on the negotiating party, or, in order to remain self-funded, create purchasing alliances, including other businesses and state and local government employee groups to empower direct negotiations by employers.87
How higher deductibles shift costs onto employees
Deductibles are another mechanism that employer-sponsored plans have used to reduce the premiums without securing lower prices for care. Deductibles in ESI plans are becoming both more common—in part because of the growth of HDHPs—and more expensive. The percentage of plans with a deductible rose from 78 percent in 2010 to 89 percent in 2021.88 The amounts of these deductibles have risen dramatically among firms of all sizes: The average deductible for a single coverage plan nearly doubled in the last decade, from $1,025 in 2010 to $2,004 in 2021.89 In 2021, average deductibles for both individual and family coverage are significantly higher ($2,378 and $4,816, respectively) for plans sponsored by small firms with 50 to 99 employees, compared with those for plans at firms with 100 or more employees ($1,865 and $3,646, respectively).90
Deductibles in ESI plans are becoming both more common … and more expensive.
Amid a tighter labor market, however, employers are feeling the pressure from employees to halt the shift to HDHPs and away from traditional plan types.91 Workers who have reached their limit to bear cost sharing may decline enrollment offers or employment offers altogether.92 The employer benefits consultancy Mercer observed that in 2021, cost shifting as a cost-containment tool now “seems to be off the table for many employers,” resulting in an “unexpected reversal” of some cost-sharing trends in plan benefit design.93
Low-income workers pay a greater share of income toward ESI coverage
Because most employers do not adjust premiums or cost sharing based on employee wages or income, those who can least afford it often end up paying a higher portion of their wages toward coverage.94 For both individual and family coverage, lower-wage workers not only contribute a greater share of their pay toward the employee contribution for premiums, but also pay more in absolute dollars than higher-wage employees. In 2022, the lowest-paid quartile of employees paid $6 more per month for individual coverage and $72 more per month for family coverage than the highest quartile of income earners, according to Bureau of Labor Statistics data.95 (see Figure 5)
Figure 5
As simple illustration of the differences in the relative financial burden of ESI premiums among workers within a firm, imagine a firm that offered a health plan for single coverage for which the employee premium contribution is $127 per month—the all-worker median contribution as of March 2022, according to the Bureau of Labor Statistics.96 At this hypothetical firm, the lowest-paid employee earns $13 per hour, which happens to be the 10th percentile of hourly wages nationally, and the highest-paid employee earns $54 per hour, equal to the 90th percentile.97 For the lowest-paid employee, the monthly premium contribution is equivalent to 10 hours’ worth of pretax wages. In contrast, the highest-paid worker can cover their premium contribution with 2 1/2 hours’ wages. (see Figure 6)
Figure 6
In addition to the cost of premiums, cost sharing in ESI can pose a barrier to lower-income workers and their families. For lower-income individuals, the deductibles in ESI plans are higher than those they would face in ACA marketplace plans if subsidy eligible. Among marketplace enrollees in silver-tier coverage—for which those with family incomes under 250 percent of the federal poverty level (FPL) can receive cost-sharing reductions—the average deductible in 2010 was less than $1,000.98 An analysis of 2018 data by the Urban Institute found “systematic and widespread gaps in access to affordable ESI” across the nation for low-income workers and the out-of-pocket maximum in ESI among private sector workers to be $4,416—four times the out-of-pocket maximum that an individual with an income at 100 percent of the FPL would face in marketplace coverage.99
For lower-income individuals, the deductibles in ESI plans are higher than those they would face in ACA marketplace plans.
These differences in ESI availability and affordability for high- and low-income workers are reflected in enrollment rates. Among employers with a high proportion of high-wage employees (35 percent earning more than $70,000), 82 percent of employees chose to take up their employer’s insurance in 2022, compared with 71 percent of employees at firms with a high proportion of low-wage employees (35 percent earning less than $30,000) that same year.100 The lack of affordability of ESI also contributes to disparities in insurance rates by income.101 In 2021, 4 percent of nonelderly adults with family incomes above 400 percent of the FPL were uninsured, in contrast to 17 percent of those at 100 percent to 399 percent of the FPL and 24 percent of those under 100 percent of the FPL.102 Workers who are offered job-based coverage generally do not qualify for income-based financial assistance to purchase ACA marketplace plans on their own, unless their ESI contribution exceeds a certain share of their income (9.12 percent in 2023).103
Some employers do offer reduced ESI premiums or cost sharing based on wage and salary levels. Large firms are more likely to offer wage-tiered premiums;104 among those that have done so are General Electric Co., Pitney Bowes, Synchrony, News Corp., and JPMorgan Chase & Co.105 About 10 percent of large firms (200 or more employees) currently have a program to lower premiums for lower-wage workers, and 5 percent have programs to reduce cost sharing for lower-wage workers.106 The Bureau of Labor Statistics reports that in 2017, nearly one-quarter of civilian employees covered by an ESI—24 percent of those with single coverage and 23 percent of those with family coverage—were enrolled in a plan with tiered premiums based on salary.107 Of those plans with premium tiers, 68 percent included three or more tiers for both single and family coverage.108 An August 2022 survey by Willis Towers Watson showed a similar portion (28 percent) of employers tiering premiums based on employee salary and an additional 13 percent of employers reporting they considered implementing a tiered structure in the next two years.109
Rising costs are unsustainable for workers and employers
Employers have attempted to contain health care costs in a variety of ways, including increasing the share of employee premium contributions, raising deductibles, and using HDHPs, as well as other tactics, such as offering a narrower network of providers or joining with other employers in provider negotiations. However, these strategies have limited impact on a key underlying cause of rising ESI costs: high prices for care. While some employers have successfully improved their bargaining position vis-a-vis providers by collaborating with other purchasers and advocating for greater price transparency, until employers can negotiate meaningfully lower prices across the board, ESI costs will continue to rise for employers and employees.110
These strategies have limited impact on a key underlying cause of rising ESI costs: high prices for care.
In a 2021 poll by the Kaiser Family Foundation and Purchaser Business Group on Health, only 4 percent of business leaders disagreed with the statement “employer costs for health benefits are excessive.”111 Nearly 9 in 10 (87 percent) respondents said they believed that in the next five to 10 years, the cost of providing health benefits would be “unsustainable,” and 85 percent believed that a “greater government role in coverage and costs” would be needed.112
Some recent health reform proposals take aim at the cost of health care for those privately insured. Several states have established cost commissions, which are tasked with benchmarking health care cost growth and conducting market analysis that can be used in enforcement actions.113 Additionally, reforms to the insurance system, such as an employer public option or default contract, could provide insurers and purchasers with leverage to secure lower prices or introduce a degree of provider rate regulation.114 Other interventions that could help lower the price of care include robust state and federal enforcement of existing antitrust laws and outlawing anti-competitive contracting practices—such as anti-steering, anti-tiering, or all-or-nothing clauses—that hamper insurance plans’ ability to tailor networks of higher-quality, lower-cost providers.115 Lastly, while the prescription drug price negotiation and drug price hike rebates included in the Inflation Reduction Act apply only to Medicare, earlier versions of drug pricing legislation would have extended those features to the commercial market, potentially saving employers and ESI enrollees $256 billion between 2023 and 2029.116
Conclusion
The financial burden of employer-sponsored coverage has grown for both employers and employees over the past decade. While employees continue to value health coverage as a highly desirable benefit and most employers see it as a crucial tool for recruitment and retention, costs are rising—and firms have dealt with this over the past decade by shifting costs through plan design changes and increasing deductibles.
Employers are worried about the long-term sustainability of ESI,117 and there is reason to believe that ESI cost growth is approaching a tipping point. Without policies to keep in check health care prices for private insurance, high ESI premiums and cost sharing; affordability problems; and income-based inequities among workers will continue to worsen.
Acknowledgments
The authors thank Sarah Millender for her suggestions and research assistance.