    Employment-Based Health Insurance: Medium and Large Employers Can
    Purchase Coverage, but Some Workers Are Not Eligible (Letter Report,
    07/27/98, GAO/HEHS-98-184).

    Pursuant to a legislative requirement, GAO reviewed the extent to which
    classes of large employers in different states have access to health
    insurance and the circumstances surrounding the lack of access, if any,
    to coverage, focusing on: (1) the extent to which medium and large
    employers in different categories and states have access to health
    insurance and the barriers, if any, these employers face in seeking
    health insurance; (2) major factors that affect employers' decisions to
    offer health insurance; and (3) the extent to which employees are
    eligible for their employer-provided health plans.

    GAO noted that: (1) virtually all medium and large employers have access
    to group health insurance, and about 90 percent actually offer health
    coverage to their employees; (2) the larger the firm the more likely it
    is to offer health insurance; (3) employers that do not offer health
    insurance are likely to be influenced by a variety of factors such as
    firm size, the wage level, and health insurance premiums; (4)
    sponsorship of health insurance by medium and large employers varies
    moderately by industry sector and somewhat more widely by state; (5)
    across the states, estimated offer rates among medium and large
    employers ranged from 72 percent in Wyoming to close to 100 percent in
    14 states in 1993; (6) the highest offer rates were concentrated in the
    Northeast, including the six New England states, New Jersey, and
    Pennsylvania; (7) the propensity of an employer to offer health
    insurance depends not only on the firm's size but on other, often
    interrelated workforce and firm characteristics, including employee
    earnings, labor turnover, and health insurance cost; (8) by contrast,
    some medium employers may be less likely to offer coverage if they
    believe that lower-wage employees would not enroll in the plans; (9) in
    addition, medium employers may be less likely to offer coverage if
    insurers charge high premiums to cover the higher administrative costs
    of handling smaller groups or the greater variability of a smaller
    group's costs due to a catastrophic medical case; (10) data on the
    prevalence of these circumstances are not available; (11) some employees
    of medium and large firms do not have access to their employers'
    sponsored health plan because of eligibility requirements; (12) the
    eligibility rate of part-time employees was about 31 percent in contrast
    to a rate of more than 80 percent for full-time workers in 1997; (13)
    although the majority of part-time employees nationwide have
    coverage--mostly through another family member's job or nonemployment
    sources--5.4 million were uninsured in 1997; and (14) uninsured
    part-time employees represented about 27 percent of the roughly 19.9
    million uninsured wage and salary workers that year.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  HEHS-98-184
         TITLE:  Employment-Based Health Insurance: Medium and Large
                 Employers Can Purchase Coverage, but Some Workers Are Not
                 Eligible
          DATE:  07/27/98
       SUBJECT:  Employee medical benefits
                 Health insurance
                 Health insurance cost control
                 Insurance premiums
                 Eligibility criteria
    IDENTIFIER:  National Center for Health Statistics National Employer
                 Health Insurance Survey

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    Cover
    ================================================================ COVER

    Report to Congressional Committees

    July 1998

    EMPLOYMENT-BASED HEALTH INSURANCE
    - MEDIUM AND LARGE EMPLOYERS CAN
    PURCHASE COVERAGE, BUT SOME
    WORKERS ARE NOT ELIGIBLE

    GAO/HEHS-98-184

    Employment-Based Health Insurance

    (101591)

    Abbreviations
    =============================================================== ABBREV

      AHCPR - Agency for Health Care Policy and Research
      BLS - Bureau of Labor Statistics
      HHS - Department of Health and Human Services
      HIPAA - Health Insurance Portability and Accountability Act of 1996
      MEPS - Medical Expenditure Panel Survey
      NCHS - National Center for Health Statistics
      NEHIS - National Employer Health Insurance Survey

    Letter
    =============================================================== LETTER

    B-278073

    July 27, 1998

    Congressional Committees

    Most Americans younger than 65 have health insurance, largely through
    their own or a family member's employment, but about 41 million
    people lacked health insurance in 1996.  Concerned about insurers'
    willingness to offer policies to small employers and certain
    individuals, the Congress passed the Health Insurance Portability and
    Accountability Act of 1996 (HIPAA) (P.L.  104-191, Aug.  21, 1996) to
    improve access to health insurance.  HIPAA contains provisions
    related to initial coverage, renewability, and portability of private
    health insurance.  These provisions vary in their application to
    large and small employers who buy or wish to buy coverage for their
    employees and individuals attempting to purchase health insurance on
    their own.  For example, HIPAA requires health insurance carriers
    operating in the "small group" market to accept any small employer
    that applies for coverage, regardless of the group's health status.
    This guaranteed-access provision does not extend to medium and large
    firms--those employing more than 50 employees.  In addition, HIPAA
    does not directly address premium rates.

    To help the Congress gain a better understanding of access issues in
    the larger group market, HIPAA required that we report on the extent
    to which classes of large employers in the different states have
    access to health insurance and the circumstances surrounding the lack
    of access (if any) to coverage.\1 This report provides the results of
    our study.\2 As agreed with your offices, we examined (1) the extent
    to which medium and large employers (those with 51 or more employees)
    in different categories and states have access to health insurance
    and the barriers (if any) these employers face in seeking health
    insurance, (2) major factors that affect employers' decisions to
    offer health insurance, and (3) the extent to which employees are
    eligible for their employer-provided health plans.\3

    To address these objectives, we analyzed government and private
    sector survey data on (1) the number of employers that offer health
    insurance to their employees by firm size, industry sector, and
    location and (2) employee eligibility rates by employment status,
    such as full-time versus part-time schedules and permanent and
    temporary work arrangements.  These data pre-dated the implementation
    of HIPAA's provisions concerning access, renewability, and
    portability of private health insurance.  We used the percentage of
    employers that offer health insurance--employers' offer rate--as a
    proxy for the extent of employers' access to the health insurance
    market.  The offer rate is a widely used indicator of employers'
    access to health insurance but it is incomplete in that it measures
    only "realized" access.  Some employers that do not currently offer
    health coverage nonetheless would be able to obtain coverage if they
    chose to purchase it; they have potential access that is not
    realized.  In contrast, other employers that do not offer coverage to
    their employees may in fact lack access to health insurance.
    Existing government and private sector surveys of employee health
    benefits do not contain information that would permit employers with
    potential but unrealized access to be distinguished from those
    lacking access.  To fill this gap, we interviewed industry experts
    and representatives from insurance agencies and brokers, state
    regulatory agencies, and employers in different states.  Information
    from these interviews also supplemented our literature review on
    factors influencing employers' decisions to provide employer-based
    health insurance coverage.  (See app.  I for details on our
    methodology.) We conducted our work between September 1997 and June
    1998 in accordance with generally accepted government auditing
    standards.

    --------------------
    \1 HIPAA also requires that the Secretary of Health and Human
    Services (HHS) report to the Congress on the extent to which large
    employers seeking to obtain health coverage in different states are
    able to do so.  HHS' report to the Congress, due every 3 years, is to
    be based, among other things, on information that HHS will request
    each state to submit no later than December 31, 2000.

    \2 Addressees are listed at the end of this letter.

    \3 HIPAA defines large employers as those with an average of at least
    51 employees during the preceding calendar year.  We use the terms
    medium and large employers to emphasize the broad range of employers
    included in HIPAA's definition of large employer.

       RESULTS IN BRIEF
    ------------------------------------------------------------ Letter :1

    Virtually all medium and large employers have access to group health
    insurance, and about 90 percent actually offer health coverage to
    their employees.  The larger the firm the more likely it is to offer
    health insurance.  For example, 1996 survey data show that about 96
    percent of firms with 100 to 199 employees offered health coverage
    compared with about 91 percent of firms with 50 to 99 employees.
    Employers that do not offer health insurance are likely to be
    influenced by a variety of factors such as firm size, the wage level,
    and health insurance premiums.

    Sponsorship of health insurance by medium and large employers varies
    moderately by industry sector and somewhat more widely by state.  For
    example, health insurance offer rates of these employers ranged from
    88 percent in the agriculture, forestry, and fishing industry sector
    to 99 percent in wholesale trade in 1993--the most recent year for
    which data are available by firm size for different industries and
    states.  Across the states, estimated offer rates among medium and
    large employers ranged from 72 percent in Wyoming to close to 100
    percent in 14 states in 1993.  The highest offer rates were
    concentrated in the Northeast, including the six New England states,
    New Jersey, and Pennsylvania.

    The propensity of an employer to offer health insurance depends not
    only on the firm's size but also on other, often interrelated
    workforce and firm characteristics, including employee earnings,
    labor turnover, and health insurance cost.  For example, the
    likelihood of health benefits being offered increases with a higher
    proportion of high-wage employees in the workforce and a lower
    turnover rate.  By contrast, some medium employers may be less likely
    to offer coverage if they believe that lower-wage employees would not
    enroll in the plans.  In addition, medium employers may be less
    likely to offer coverage if insurers charge high premiums to cover
    the higher administrative costs of handling smaller groups or the
    greater variability of a smaller group's costs due to a catastrophic
    medical case.  Data on the prevalence of these circumstances are not
    available.

    Some employees of medium and large firms do not have access to their
    employers' sponsored health plans because of eligibility
    requirements.  For example, many part-time and temporary employees
    are not eligible for coverage under their employers' health plans.
    The eligibility rate of part-time employees was about 31 percent in
    contrast to a rate of more than 80 percent for full-time workers in
    1997.  Although the majority of part-time employees nationwide have
    coverage--mostly through another family member's job or nonemployment
    sources--5.4 million were uninsured in 1997.  Uninsured part-time
    employees represented about 27 percent of the roughly 19.9 million
    uninsured wage and salary workers that year.

       BACKGROUND
    ------------------------------------------------------------ Letter :2

    Employment-based health insurance is the leading source of private
    health insurance in the United States.  In 1996, about 64 percent of
    the population under 65 years old had employment-based health
    insurance.  This employer-based system of health insurance is almost
    entirely voluntary.\4

    The majority of private business establishments in the United States
    are small, but most workers are employed by medium and large
    employers.  A business establishment is a single location where
    economic activity is conducted.  As shown in figure 1, establishments
    with fewer than 20 workers constituted about 88 percent of the total
    but accounted for only about 26 percent of the U.S.  employment in
    1996.  In contrast, medium and large establishments, with 50 or more
    employees, represented about 5 percent of the total but accounted for
    about 58 percent of U.S.  employment.  Figure 1 also shows that more
    than one-quarter of all employees work for establishments employing
    250 or more people, but these businesses represent less than 1
    percent of all establishments.  Three industries--services, retail
    trade, and manufacturing--accounted for the majority (about 73
    percent) of all private sector employment in 1996.  (See fig.  2.)

       Figure 1:  Relationship Between
       Private Sector Establishment
       Size and Employment
       Concentration, First Quarter
       1996

       (See figure in printed
       edition.)

    Source:  U.S.  Department of Labor, Bureau of Labor Statistics,
    published November 1997.

       Figure 2:  Percentage of
       Private Sector Employment by
       Industry, 1996

       (See figure in printed
       edition.)

    Source:  U.S.  Department of Labor, Bureau of Labor Statistics,
    published November 1997.

    --------------------
    \4 Hawaii is the only state permitted under the Employee Retirement
    Income Security Act of 1974 to mandate that employers offer health
    insurance.

       MEDIUM AND LARGE EMPLOYERS HAVE
       NEARLY UNIVERSAL ACCESS TO
       HEALTH INSURANCE
    ------------------------------------------------------------ Letter :3

    Survey data that we analyzed and our interviews with brokers
    indicated that virtually all medium and large firms have access to
    health insurance coverage.  Their estimated offer rates of more than
    90 percent show that these firms typically take advantage of their
    access by offering coverage.  While the estimated health insurance
    offer rates between large and small employers differ markedly, the
    offer rates among medium and large employers vary moderately by firm
    size and industry and somewhat more widely by state.

    As shown in table 1, the estimated percentage of medium and large
    employers that offered health insurance in 1996 ranged from 91 to 99
    percent, with larger firms more likely to offer health insurance than
    medium firms.  In contrast, the estimated offer rate among employers
    with fewer than 50 employees averaged less than 50 percent, according
    to a recent KPMG Peat Marwick health benefits survey.\5 Medium
    employers that do not offer health coverage generally have access to
    health insurance but may decide for various reasons that they do not
    need to offer health benefits as part of their employee compensation
    package or may consider the cost of providing health coverage to be
    too high relative to their profits or employees' wages.

                              Table 1

                Estimated Percentage of Private and
              Public Sector Employers Offering Health
                    Insurance by Firm Size, 1996

                                                 Percentage of
                                                firms offering
    Number of employees in firm               health insurance
    --------------------------------------  ------------------
    Less than 50                                            48
    50-99                                                   91
    100-199                                                 96
    200 and more                                            99
    All                                                     51
    ----------------------------------------------------------
    Source:  KPMG Peat Marwick.

    The most recent data available that permit analysis of health
    insurance offer rates by industry sector and states across firm sizes
    come from the 1993 National Employer Health Insurance Survey (NEHIS),
    managed by HHS' National Center for Health Statistics (NCHS).  These
    data show modest variation in the percentage of employers offering
    health insurance across industry sectors.  Among medium and large
    employers in different industries, the estimated offer rates in 1993
    ranged from 88 to 99 percent.  The industries with the highest
    estimated offer rates (more than 95 percent) were wholesale trade;
    mining; manufacturing; finance, insurance, and real estate; and
    transportation, communications, and utilities.  As shown in figure 3,
    slightly lower offer rates (between 88 and 94 percent) prevailed in
    the retail trade; construction; services; and agriculture, forestry,
    and fishing industries.  The industries with estimated lower offer
    rates are characterized by higher rates of labor turnover and
    prevalence of temporary and part-time workers.  A similar
    relationship between offer rates and type of industry was found among
    small employers, but small employers' offer rates were markedly lower
    across all industries, ranging from 29 to 56 percent.

       Figure 3:  Estimated Percentage
       of Establishments Offering
       Health Insurance by Type of
       Industry and Firm Size, 1993

       (See figure in printed
       edition.)

    Source:  NEHIS.

    Variation by state is wider than by industry.  At the state level,
    the estimated offer rate among medium and large employers ranged from
    a low of about 72 percent in Wyoming and Texas to almost 100 percent
    in 14 states.  The higher offer rates were concentrated in the
    Northeast, including the six New England states, New Jersey, and
    Pennsylvania.  Because these estimates are based on survey data, the
    estimate derived from the sample may be higher or lower than the true
    percentage of all employers in the state that offer health insurance.
    Because of the small number of establishments surveyed in certain
    states, the degree of imprecision for these estimates, as measured by
    their confidence intervals, can be quite large.  Details on the
    estimated offer rates by firm size in each state and associated
    confidence intervals for each firm size grouping are in appendix II.

    Survey data on offer rates presented above estimate the extent of
    realized access to insurance, but employers that do not offer health
    coverage often have potential access.  That is, such employers have a
    choice.  According to insurers, insurance brokers, and employers that
    we interviewed, employers with more than 50 workers generally can get
    an insurer to write a policy covering their workforce.\6 However,
    insurers and brokers we interviewed pointed out that the price of
    such coverage for employers that have close to 50 employees might
    differ substantially--from employer to employer and from insurer to
    insurer.

    Survey data, studies, and interviews with market participants
    indicate that variations in health insurance offer rates by firm
    size, industry, and state reflect decisions that medium and large
    employers make about offering health coverage, not difficulties they
    face in obtaining access to health insurance.  As discussed below,
    multiple factors, including the characteristics of a firm and its
    workforce and the cost of health insurance, influence employers'
    health insurance decisions.

    --------------------
    \5 KPMG Peat Marwick also reported the following offer rates among
    small firms in 1996:  1 to 9 employees, 42 percent; 10 to 24
    employees, 78 percent; and 25 to 49 employees, 90 percent.

    \6 Other evidence on the extent of access is the number of employers
    that are offered health insurance.  According to an analysis by
    Professor Gail A.  Jensen (from Wayne State University) of a 1993
    national survey, over 80 percent of employers with 50 to 199
    employees reported receiving at least one solicitation to buy health
    insurance in the last 6 months.

       DIFFERENCES IN OFFER RATES
       REFLECT FIRMS' WAGE LEVELS AND
       OTHER TRAITS
    ------------------------------------------------------------ Letter :4

    Although the likelihood of a firm's offering health insurance is
    strongly linked with its size, whether an employer offers health
    coverage to its workers also depends on the characteristics of its
    workforce, the cost of providing health insurance, the firm's
    financial condition, and the competitive environment in which it
    operates.  Many of these factors are interrelated, and while research
    studies we reviewed do not estimate the separate effect of these
    factors, our analysis of survey data and research studies illustrates
    the relationship between offer rates and certain characteristics of a
    firm's workforce such as employee earnings and labor turnover.\7

    Our analysis of 1993 NEHIS data supports other studies' findings that
    employers' offer rates are lower when their workforces are
    characterized by low wages and high labor turnover.  In addition, the
    price of health coverage is likely to contribute to decisions that
    some medium firms make regarding whether to offer health insurance.

    --------------------
    \7 For further information on employer characteristics that have been
    related to health insurance decisions, see NCHS, Employer-Sponsored
    Health Insurance:  State and National Estimates, PHS 98-1005
    (Hyattsville, Md.:  1997); and Len Nichols and others, Small
    Employers:  Their Diversity and Health Insurance (Washington, D.C.:
    Urban Institute, 1997).  The labor turnover rate measures the
    aggregate movement of persons into and out of jobs and between jobs.

          THE ROLE OF WAGES
    ---------------------------------------------------------- Letter :4.1

    NEHIS data show that employers with predominantly low-wage
    employees--those earning less than $10,000 per year--are less likely
    to offer health insurance to their workers.\8 The effect is generally
    stronger the smaller the firm.  The difference in estimated health
    insurance offer rates between employers whose workers typically
    earned less than $10,000 and those whose workers typically earned
    $10,000 or more a year in 1993 ranged from 10 percentage points among
    employers with more than 200 employees to 33 percentage points among
    employers with 51 to 100 employees.  (See table 2.)

                              Table 2

               Relationship Between Employers' Health
                Insurance Offer Rates and Employees'
                    Earnings by Firm Size, 1993

                        (Numbers in percent)

                                     51 to    101 to      More
                        Up to 50       100       200  than 200
    Annual wage level   employee  employee  employee  employee
    of employees               s         s         s         s
    ------------------  --------  --------  --------  --------
    Majority earned           19        61        73        87
     less than $10,000
    Majority earned           51        94        95        97
     $10,000 or more
    Difference between        32        33        22        10
     higher-and lower-
     wage firms
    ----------------------------------------------------------
    Source:  NEHIS.

    The relatively low offer rate among employers with typically low-wage
    employees is partly because the cost of health insurance represents a
    substantial expense for both employers and employees.  According to
    Mercer/Foster-Higgins' 1997 national survey of employers, the
    nationwide average cost of providing health insurance to an employee
    ranged from $3,200 per year for a health maintenance organization
    plan to about $3,500 per year for an indemnity plan.  For the
    employer, paying a significant portion of such premiums would add
    considerably to the compensation of lower-wage workers or could lead
    the employer to offset the cost of health insurance by reducing
    wages.  For employees earning lower wages, paying the required share
    of premium costs may be prohibitive.

    Contributions employers make toward employees' health benefits are
    excluded from employees' taxable income.  However, this tax exclusion
    is of lesser value to lower-wage employees who have a lower tax rate
    than to high-wage employees.  Because low-wage workers do not benefit
    as much as high-wage workers from the tax advantage associated with
    employer-sponsored health insurance, many low-wage workers are likely
    to prefer cash wages over health coverage.  As a result, lower-wage
    workers may decline to enroll in an employer-based plan if one is
    offered.  If few workers choose to participate in a plan, the firm
    may decide not to offer coverage.\9

    --------------------
    \8 For further information on health insurance offer rates by
    employee wage level and firm size, see NCHS, Employer-Sponsored
    Health Insurance.

    \9 A factor contributing to such a decision is that carriers may
    require that employers have a certain minimum percentage of eligible
    employees to enroll in a group health plan.  This threshold
    percentage typically varies between 75 and 100 percent.

          THE ROLE OF LABOR TURNOVER
    ---------------------------------------------------------- Letter :4.2

    Although NEHIS data do not measure the degree of labor turnover,
    various studies have cited it as predictor of the likelihood that a
    firm will offer health insurance.\10 Some research literature
    indicates that firms with high labor turnover rates are less likely
    to offer health insurance.  Quantitative analyses of the link between
    labor turnover and firms' decisions to offer health insurance are
    rare, but several health insurance industry experts we interviewed
    indicated that this relationship exists.\11 Because labor turnover
    varies by industry, this relationship can be illustrated by examining
    industry data.  U.S.  Bureau of the Census data show that industries
    that have labor turnover rates higher than the national average such
    as agriculture, forestry and fishing; services; construction; and
    retail trade had lower offer rates than industries with low turnover
    rates.\12

    This relationship is illustrated in figure 4, which shows that
    industries with average monthly labor turnover rates around 10
    percent or more had health insurance offer rates below 55 percent.\13
    In contrast, industries with average monthly turnover rates below 7
    percent had offer rates greater than 60 percent.

       Figure 4:  Average Monthly
       Labor Turnover Rates by
       Industry Group and Estimated
       Employers' Offers of Health
       Insurance

       (See figure in printed
       edition.)

    Source:  U.S.  Bureau of the Census and NEHIS data.

    --------------------
    \10 See Paul B.  Ginsburg, Jon R.  Gabel, and Kelly A.  Hunt,
    "Tracking Small-Firm Coverage, 1989-1996," Health Affairs, Jan.-Feb.
    1998, pp.  167-171, and Stephen H.  Long and M.  Susan Marquis, "Gaps
    in Employment-Based Health Insurance:  Lack of Supply or Lack of
    Demand?" in U.S.  Department of Labor, Health Benefits and the
    Workforce (Washington, D.C.:  1992), pp.  37-42.

    \11 See Len M.  Nichols and others, Small Employers, p.  40 and Cori
    E.  Uccello, Firms' Health Insurance Decisions:  The Relative Effects
    of Firm Characteristics and State Insurance Regulations (Washington,
    D.C.:  Urban Institute, July 1996).

    \12 U.S.  Bureau of the Census, Current Population Reports, Dynamics
    of Economic Well-Being:  Labor Force, 1991-1993 (Washington, D.C.:
    Aug.  1995).  Labor turnover rates that exceed 10 percent are
    considered high relative to the national average rate of 7 percent.
    The latest available data on labor turnover rates by industry sector
    were collected by the U.S.  Bureau of the Census in 1991.

    \13 Because turnover data were not available by firm size, the
    estimated offer rates cited in this section are for all firm sizes.

          THE ROLE OF PREMIUM COSTS
    ---------------------------------------------------------- Letter :4.3

    In health benefits surveys that examine reasons some employers
    (especially those in smaller firms) do not offer health insurance,
    employers have frequently cited high premium costs as a key factor in
    their decisions.  However, data needed to determine the extent to
    which costs affect the decisions medium and large employers make
    regarding health coverage are lacking.\14 Although data are available
    on premiums charged to employers who offer health coverage, data are
    lacking on premium rates that firms not offering health insurance
    would face if they sought to offer health coverage.  To address the
    lack of data on actual premiums faced by non-offering firms,
    researchers have developed various indirect methods but have applied
    them only to data on small employers, the group with the lowest
    percentage of employers offering health insurance.\15

    Moreover, available data on average premiums may mask important
    differences in the premiums charged to some medium firms that share
    some of the characteristics of small employers.  For example, recent
    data collected by a health benefits consulting firm show that health
    insurance premiums do not vary greatly by employer size.  By
    contrast, some older studies found that insurance companies charged
    higher premiums to small companies because of the higher risks and
    higher cost of marketing and claims administration involved in
    providing coverage to small companies.\16 In addition, research based
    on data from the 1980s showed that smaller employers have less power
    to negotiate price discounts than larger employers.  However, some
    studies that report recent data generally do not adjust for
    differences in the depth and breadth of health benefits offered.
    Although smaller firms may be paying premiums similar to those paid
    by larger firms, smaller firms (including those near the 50-employee
    threshold) generally have less-generous health benefit packages with
    higher deductibles.  In effect, these smaller firms are paying more
    per dollar of benefits provided or claims reimbursed.\17

    Some insurance brokers we interviewed said that some medium employers
    (those closer to the 50-employee threshold) face greater variability
    in health insurance claims cost and in premiums than larger
    employers.  The extent of premium variation depends on how premiums
    are set.  For example, a firm with 55 employees whose premiums are
    based on experience rating--the group's historical medical costs--may
    be charged higher per capita premiums in the future if an employee or
    dependent were to incur catastrophic medical costs than a firm with
    500 to 1,000 employees that also had a single very expensive case.
    In practice, the extent to which the premium increases for such a
    firm depends, among other things, on whether the firm can negotiate
    with its insurer for lower premium costs, the pressures of state
    regulation that may limit premium variation or restrict premium
    increases, and the rating practices of the insurer.\18

    --------------------
    \14 The role of costs in the small-group market has also become
    increasingly difficult to assess because this market has been
    changing rapidly.  Recent surveys indicate that the importance of
    high premium costs as a factor in small firms' decisions to offer
    coverage has been declining.  For a discussion of these trends, see
    Paul B.  Ginsburg, Jon R.  Gabel, and Kelly A.  Hunt, "Tracking
    Small-Firm Coverage, 1989-1996," Health Affairs, Jan.-Feb.  1998, and
    Gail A.  Jensen and Michael A.  Morrisey, "Managed Care and the Small
    Group Market," paper prepared for the conference:  Managed Care and
    Changing Health Care Markets, American Enterprise Institute,
    Washington, D.C., Apr.  10, 1997.

    \15 For example, a recent study of the role of premiums in the
    decision to offer insurance uses an econometric approach to predict
    these unobserved premiums.  The study obtained results for a sample
    of Minnesota firms with less than 50 employees.  See Roger Feldman
    and others, "The Effect of Premiums on the Small Firm's Decision to
    Offer Health Insurance.", Journal of Human Resources, Vol.  32, No.
    4 (24) (Fall 1997), p.  635.  For information on other studies, see
    Michael A.  Morrisey and Gail A.  Jensen, "State Small Group
    Insurance Reform," pp.  71-90 in Robert Reich and William White,
    Health Policy, Federalism, and the American States (Washington, D.C.:
    Urban Institute Press, 1996).

    \16 Some older studies are Stephen H.  Long and M.  Susan Marquis,
    "Gaps in Employment-Based Health Insurance," and Arleen Leibowitz,
    Cheryl Damberg, and Kathleen Eyre, "Multiple Employer Arrangements,"
    in Health Benefits and the Workforce (Washington, D.C.:  U.S.
    Department of Labor, 1992).

    \17 For more information on average premiums for medium and small
    firms, see Gail A.  Jensen and others, "The New Dominance of Managed
    Care:  Insurance Trends in the 1990s," Health Affairs, Vol.16, No.  1
    (Jan.-Feb.  1997), pp.  125-136.

    \18 For information on state approaches to premium rate restrictions
    among small employers, see Health Insurance Regulation:  Variation in
    Recent State Small Employer Health Insurance Reforms
    (GAO/HEHS-95-161FS, June 12, 1995).  While some medium firms'
    premiums are experience-rated, other firms in this size group are
    charged premiums that are based on a combination of the claims cost
    history of their own employees and the claims cost experience of a
    much larger pool of individuals.

       GAPS IN ELIGIBILITY LIMIT MANY
       EMPLOYEES' ACCESS TO HEALTH
       INSURANCE FROM THEIR EMPLOYERS
    ------------------------------------------------------------ Letter :5

    Although most medium and large businesses offer health coverage, many
    employees lack access to the health benefits their employers sponsor.
    In particular, part-time employees or those with a temporary work
    arrangement are not eligible for their employer-sponsored health
    insurance plans.\19 Although more than half of such employees obtain
    health coverage from other sources, such as through their spouses,
    Medicare or Medicaid, or the individual insurance market, the
    uninsurance rates for part-time and temporary employees are high--25
    and 33 percent, respectively.

    --------------------
    \19 We use the Bureau of Labor Statistics' (BLS) definition of
    part-time employees, which applies to persons who work less than 35
    hours per week.  However, employers vary in how they define part-time
    work.  For example, an employee who works 32 hours may be considered
    to be a full-time worker in firm A; this same employee may be
    considered a part-time employee in firm B.  We use the term temporary
    work to refer to any job that is structured to be of limited
    duration.  Temporary employees are individuals in jobs that are
    expected to last only a limited period of time.  This definition
    includes wage and salary, self-employed, and independent workers who
    expect their jobs to end within a year or do not expect the jobs to
    last.  BLS classifies these employees as contingent workers.

          MOST PART-TIME WORKERS
          INELIGIBLE FOR
          EMPLOYMENT-BASED HEALTH
          COVERAGE RELY ON OTHER
          SOURCES BUT MANY ARE
          UNINSURED
    ---------------------------------------------------------- Letter :5.1

    Part-time employees, who constitute about 19 percent of the total
    workforce, are much less likely to be eligible for health insurance
    than full-time employees, even though their employers offer coverage.
    As table 3 shows, in 1997, 31 percent of part-time employees were
    eligible for their employer-sponsored health insurance compared with
    82 percent of full-time employees.  Moreover, the percentage of firms
    in which part-time employees were eligible for coverage declined from
    55 percent in 1994 to 47 percent in 1997, according to KPMG Peat
    Marwick data.

                              Table 3

                 Part-Time and Full-Time Employees'
               Health Insurance Status, February 1997

                                     Part-     Full-
    Health insurance status           time      time       All
    ----------------------------  --------  --------  --------
    Eligible for coverage from         31%       82%       72%
     current employer health
     plan
    Total covered                      75%       84%       82%
    Through current employer            17        70        59
    Through other sources\a             58        14        23
    Uninsured                          25%       16%       18%
    Total number employed aged      21,297    90,268  111,837\
     16 years and older (in                                  b
     thousands)
    ----------------------------------------------------------
    \a Other sources include other job, union, spouse's health plan,
    Medicaid, Medicare, TRICARE, or purchased in the individual insurance
    market.

    \b The total is greater than the sum of part-time and full-time
    employees because the usual status of a person's main job could not
    be determined for a small number of respondents.

    Source:  BLS, unpublished tabulations from the February 1997
    Contingent and Alternative Employment Arrangement Survey.

    Despite their relatively low eligibility rate, about three-quarters
    of part-time employees had health insurance coverage in 1997.  The
    main reason for the discrepancy between eligibility and coverage
    rates is that over half of part-time employees were able to obtain
    health insurance coverage through other sources, such as other jobs,
    family members, the individual insurance market, and Medicare or
    Medicaid.  Nonetheless, about one-fourth of the part-time workforce
    (or 5.4 million employees) was uninsured as of February 1997,
    according to data from BLS.  Uninsured part-time employees accounted
    for about 27 percent of the 19.9 million uninsured wage and salary
    workers in 1997.  The majority of the uninsured part-time employees
    were between the ages of 16 and 34, a group that generally has lower
    earnings compared with most older workers.\20

    Similar disparities between the eligibility of part-time and
    full-time workers are observed when looking at data for different
    firm sizes.  Agency for Health Care Policy and Research (AHCPR) data
    for 1996 show that full-time employees were offered health insurance
    from their current main employers at more than twice the rate of
    part-time employees for firms with up to 200 employees.  For firms
    with more than 200 workers, the ratio of full-time to part-time rates
    of eligibility is about 1.7 to 1.  (See table 4.)

                              Table 4

                 Part-Time and Full-Time Employees
              Offered Health Insurance at Current Main
                     Job by Employer Size, 1996

                        (Numbers in percent)

                                     Part-     Full-
    Number of employees               time      time       All
    ----------------------------  --------  --------  --------
    Up to 50                            19        66        53
    51-100                              40        90        80
    101-200                             37        91        83
    Over 200                            57        96        92
    All                                 27        80        69
    ----------------------------------------------------------
    Note:  Employer size is defined by the number of employees working
    for organizations.  Percentages include private and public employees.
    Public sector employment accounted for about 16 percent of U.S.
    workers aged 16 years and over in 1996.

    Source:  HHS/AHCPR Medical Expenditure Panel Survey (MEPS).

    --------------------
    \20 Like uninsured part-time workers, the uninsured in general tend
    to be young.

          TEMPORARY EMPLOYEES ARE LESS
          LIKELY TO BE OFFERED HEALTH
          INSURANCE THAN PERMANENT
          EMPLOYEES
    ---------------------------------------------------------- Letter :5.2

    In addition to work schedule, anticipated job duration--short-term or
    temporary versus more long-term or permanent--affects the likelihood
    that employees will be eligible for their employer-provided health
    benefits.  Temporary employees are less than half as likely to be
    eligible for health coverage than permanent workers.  Specifically,
    of the 5.1 million temporary employees in the U.S.  workforce in
    1997, only 35 percent were eligible to participate in their
    employers' health insurance.\21 In contrast, 74 percent of permanent
    employees were eligible for their employers' health insurance.

    The percentage of temporary workers eligible for their employers'
    health insurance varies across industries.  Private-sector industries
    with the lowest eligibility rates for temporary employees in 1997
    were agriculture (18 percent), retail (23 percent), and construction
    (29 percent).  By contrast, eligibility rates for temporary employees
    were highest among the manufacturing and transportation industries
    (45 and 46 percent).  In general, the data show a direct relationship
    between the eligibility rates for temporary workers and the offer
    rates for all employees within a particular industry sector.  For
    example, industries characterized by low rates of eligibility for
    temporary workers (agriculture, retail trade, and construction) also
    had relatively low offer rates for all employees, as shown in figure
    3.

    Although eligibility rates for temporary workers were lower than for
    permanent workers, two-thirds of temporary workers had health
    insurance from a variety of sources (often through family health
    coverage).  Nonetheless, the uninsurance rate for temporary workers
    was about 33 percent (or 1.7 million people) in 1997 compared with 17
    percent for permanent workers.  Moreover, temporary workers generally
    earn less than permanent workers.  The median weekly earnings of
    temporary workers in 1997 was $266 compared with $444 for permanent
    workers.\22 Consequently, many temporary workers might not be able to
    afford their share of health insurance cost even if they were
    eligible for their employer-sponsored health plans.

    --------------------
    \21 Temporary employees constituted about 5 percent of the U.S.
    workforce in 1997.  Data are not readily available to categorize
    temporary workers by firm size; thus, this discussion compares
    eligibility rates for all temporary workers with all permanent
    workers.

    \22 The lower median earnings for temporary workers is influenced by
    the relatively high concentration of part-time workers in that
    category.  In 1997, 43 percent of temporary workers were part-time,
    compared with 18 percent of permanent workers.

       CONCLUSIONS
    ------------------------------------------------------------ Letter :6

    Under HIPAA, insurers cannot deny coverage to a firm with 50 workers
    or less, but some have questioned whether firms just past this
    threshold escape the difficulties that small firms used to face.  As
    the evidence presented above shows, virtually all medium and large
    firms have access to health insurance.  However, health coverage is
    not universal.  Despite access to insurance, about 10 percent of
    firms with 50 to 99 workers (and a small proportion of larger firms)
    choose not to offer it, and some firms may be deterred by what they
    see as unfavorable or unaffordable premiums.  Perhaps more important,
    even when an employer offers health insurance, the offer may not
    extend to all the firm's workers.  Part-time and temporary employees
    often are not eligible for an employer's plan, and lower-wage workers
    may not find it affordable.  In the market for health insurance,
    employers' and workers' decisions are voluntary.  Consequently, a
    reversal of an employer's decision to forgo offering coverage or an
    employee's decision to decline an offer hinges on coverage becoming
    more attractive and affordable.

       COMMENTS FROM OUTSIDE REVIEWERS
    ------------------------------------------------------------ Letter :7

    We obtained comments on a draft of this report from a number of
    experts on private health insurance including those with NCHS, the
    Employee Benefit Research Institute, and the Health Insurance
    Association of America.  The reviewers agreed with the contents of
    the report and suggested a number of technical corrections that we
    incorporated where appropriate.

    ---------------------------------------------------------- Letter :7.1

    We are sending copies of this report to interested congressional
    committees and are making copies available to others on request.

    Please call me at (202) 512-7114 if you or your staff have any
    questions about this report.  Other GAO contacts and staff
    acknowledgments for this report are listed in appendix III.

    William J.  Scanlon
    Director, Health Financing and
     Systems Issues

    List of Addressees

    The Honorable William V.  Roth, Jr.
    Chairman
    The Honorable Daniel Patrick Moynihan
    Ranking Minority Member
    Committee on Finance
    United States Senate

    The Honorable James M.  Jeffords
    Chairman
    The Honorable Edward M.  Kennedy
    Ranking Minority Member
    Committee on Labor and Human Resources
    United States Senate

    The Honorable Thomas J.  Bliley, Jr.
    Chairman
    The Honorable John D.  Dingell
    Ranking Minority Member
    Committee on Commerce
    House of Representatives

    The Honorable William F.  Goodling
    Chairman
    The Honorable William Clay
    Ranking Minority Member
    Committee on Education and the Workforce
    House of Representatives

    The Honorable William Archer
    Chairman
    The Honorable Charles B.  Rangel
    Ranking Minority Member
    Committee on Ways and Means
    House of Representatives

    METHODOLOGY
    =========================================================== Appendix I

    The Health Insurance Portability and Accountability Act of 1996 (P.L.
    104-191, Aug.  21, 1996) directed us to examine the extent to which
    classes of large employers in the different states have access to
    health insurance and the circumstances for the lack of access, if
    any.  In consultation with the offices of the committees interested
    in the subject matter, we agreed to report on (1) the extent to which
    medium and large employers in different states and categories have
    access to health insurance and the barriers (if any) that these
    employers face in obtaining health insurance; (2) major factors,
    including health insurance costs, that affect employers' decisions to
    offer health insurance; and (3) the extent to which employees are
    eligible for and covered by their employers' health insurance.\23

    --------------------
    \23 While the act speaks only of small and large employers and
    defines large employers as those that employed an average of at least
    51 employees during the preceding calendar year and that employ at
    least 2 employees on the first day of a plan year, we are using the
    terms medium and large employers to emphasize the broad range of
    employers included in that definition--firms employing from 51 to
    several thousand employees.

       MEDIUM AND LARGE EMPLOYERS'
       ACCESS TO HEALTH INSURANCE
    --------------------------------------------------------- Appendix I:1

    Because direct measures of access do not exist, we used available
    data on employers that offer health insurance as a proxy for the
    extent of access.  This may understate the true level of employers'
    access to insurance because it excludes employers that have access to
    health insurance but decide not to offer it to their employees.

    To analyze employers' access to health insurance in different states
    and classes, we used data covering 1993 (the most recent source for
    state-level estimates) from the National Employer Health Insurance
    Survey (NEHIS) and from KPMG Peat Marwick's survey of employers for
    1996.

          NEHIS
    ------------------------------------------------------- Appendix I:1.1

    NEHIS was managed by the National Center for Health Statistics
    (NCHS), a component of the Centers for Disease Control and Prevention
    of the Department of Health and Human Services in partnership with
    the Agency for Health Care Policy Research and the Health Care
    Financing Administration.  This survey had usable responses from
    about 35,000 private business establishments.  The sampling unit for
    NEHIS was the establishment, defined as "an economic unit, generally
    at a single physical location, where business is conducted or where
    services or industrial operations are performed."\24 A primary reason
    that NEHIS sampled establishments rather than firms is that
    establishments are confined within state borders, allowing state
    estimates.

    NEHIS included a probability sample of employers in each state and
    the District of Columbia, and we used these data because the data set
    was large enough to allow us to

      -- group establishments into categories by number of employees,
         such as firms with 50 or fewer employees, 51 to 100 employees,
         101 to 200 employees, and more than 200 employees,\25

      -- report state-level information; and

      -- group establishments into categories, such as type of industry.

    Businesses in all states and the District of Columbia are represented
    in the survey.  The minimum number of participating establishments
    was 383 in Alaska; the maximum number was 1,083 in California.
    Respondents were asked to describe the characteristics of their firms
    and their health insurance programs as of December 31, 1993.  The
    results from NEHIS included in this report are for private sector
    establishments only.

    NCHS staff performed certain data analyses for us at our request.  We
    did not independently verify the data entry or data analysis work
    NCHS performed, although we confirmed that the results of its
    analyses for us were consistent with results contained in a report
    NCHS prepared under its own name.

    Survey data based on samples of populations are subject to sampling
    errors, which can be expressed as confidence intervals around a point
    estimate.  The estimated percentage of establishments that offered
    health insurance in the states, the District of Columbia, and
    nationwide are shown with the corresponding confidence intervals for
    those point estimates in appendix II.  Those data are depicted as
    bars, showing the relative position of the estimated offer rates and
    the confidence interval for those estimates at the 95-percent
    confidence level.  NEHIS data were also used in other tables
    describing features of establishments that offered health insurance.
    The estimated sampling errors (at the 95-percent confidence level)
    for the percentage of establishments offering health insurance are

      -- by industry type and firm size, in figure 3, plus or minus 1
         percent to plus or minus 9 percent and

      -- by general wage level, by firm size and nationwide, in table 2,
         plus or minus 1 percent to plus or minus 8 percent.

    --------------------
    \24 Establishments are not the same as firms.  Firms may be composed
    of one or more establishments under common ownership or control, and
    a large firm may have several establishments (or locations) where
    economic activity takes place within a single state or in several
    states.

    \25 For grouping by firm size, the unit of analysis is the
    establishment.  Thus, survey responses from an establishment of 50
    employees that is part of a firm with more than 200 employees
    nationwide would be included in the group of firms with more than 200
    employees.

          KPMG PEAT MARWICK
    ------------------------------------------------------- Appendix I:1.2

    KPMG Peat Marwick conducts and publishes its results from surveys on
    employee compensation and benefits.  We used data from KPMG Peat
    Marwick (some published and some unpublished) to provide more current
    estimates of the percentage of business firms in various size
    categories that offered health insurance in 1996.  These survey data
    included the company's annual survey of firms employing 200 or more
    employees, supplemented by an additional survey of firms with fewer
    than 200 employees.  The surveys were stratified random surveys of a
    total of about 2,600 employers nationwide.  While more current than
    the 1993 NEHIS data, KPMG Peat Marwick did not report state-level
    estimates from its survey.  Thus, we used these data to compare with
    the NEHIS data at the national level.\26 We did not independently
    verify the KPMG Peat Marwick data, but these data are widely used by
    researchers.

    --------------------
    \26 The data needed to compute sampling errors for the estimates from
    KPMG Peat Marwick were not available to us.

       FACTORS INVOLVED IN EMPLOYER
       DECISIONS TO OFFER HEALTH
       INSURANCE
    --------------------------------------------------------- Appendix I:2

    To examine the reasons that employers who had access to insurance
    decided not to offer health insurance to their employees, we reviewed
    recent studies on health insurance published by health insurance
    researchers and our earlier reports and interviewed a broad range of
    people who were knowledgeable about the insurance market and
    employers' behavior.  We interviewed benefit consultants and health
    policy researchers; representatives of employers in California,
    Pennsylvania, and Virginia who employed from 80 to 185 employees;
    insurance agents and brokers in California, Maine, Massachusetts, and
    Oregon; representatives of the Health Insurance Association of
    America and insurance companies; and state insurance regulators in
    Oregon, Pennsylvania, Utah, and Wisconsin.  We selected the persons
    we interviewed to provide a geographical cross-section of the nation.

       EMPLOYEE ACCESS TO
       EMPLOYER-SPONSORED HEALTH
       INSURANCE
    --------------------------------------------------------- Appendix I:3

    Another aspect of access to health insurance is the employee's view.
    Both an employer and employee may have access to insurance.  The
    employer may decide to offer insurance, but an employee may decline
    to enroll.  People may decline to enroll for a variety of reasons,
    including not being able to afford the insurance or having coverage
    through another source, such as another family member's coverage.

    Our data sources for employee access to health insurance included

      -- the Agency for Health Care Policy and Research and NCHS' Medical
         Expenditure Panel Survey (MEPS) Household Component, which
         provides current information on health insurance offers and
         coverage from a sample of about 25,000 persons, and

      -- the Bureau of Labor Statistics' (BLS) 1994, 1995, and 1997
         surveys of small, medium, and large employers.

    The MEPS data are the source of our estimate of the percentage of
    employees eligible for their employer-based health insurance plans in
    1996, by firm size and work schedule, included in table 4.  The
    sampling errors for those estimates are plus or minus 1 percent to
    plus or minus 8 percent.  Estimates of sampling errors for data we
    obtained from BLS were not available to us.  Although we did not
    independently verify the accuracy of the data, the MEPS and BLS data
    that we used were published or made available for others' use by the
    sponsoring agencies.

    HEALTH INSURANCE OFFER RATES BY
    FIRM SIZE AND STATE, 1993
    ========================================================== Appendix II

       Figure II.1:  Health Insurance
       Offer Rates for Firms With Up
       to 50 Employees and Firms With
       More Than 50 Employees,
       Nationwide and by State, 1993,
       Based on NEHIS Data

       (See figure in printed
       edition.)

       Figure II.2:  Health Insurance
       Offer Rates for Firms With 51
       to 100 Employees, Nationwide
       and by State, 1993, Based on
       NEHIS Data

       (See figure in printed
       edition.)

       Figure II.3:  Health Insurance
       Offer Rates for Firms With 101
       to 200 Employees, Nationwide
       and by State, 1993, Based on
       NEHIS Data

       (See figure in printed
       edition.)

       Figure II.4:  Health Insurance
       Offer Rates for Firms With More
       Than 200 Employees, Nationwide
       and by State, 1993, Based on
       NEHIS Data

       (See figure in printed
       edition.)

    GAO CONTACTS AND STAFF
    ACKNOWLEDGMENTS
    ========================================================= Appendix III

    GAO CONTACTS

    Jonathan Ratner, Senior Health Economist, (202) 512-7107
    Carmen Rivera-Lowitt, Evaluator-in-Charge, (202) 512-4342

    STAFF ACKNOWLEDGMENTS

    Roger Hultgren, Senior GAO Evaluator, assisted in the design and
    implementation of the study.  Paula Bonin, C.  Robert DeRoy, and
    Elsie Picyk provided analyses of computerized databases.

    RELATED GAO PRODUCTS

    Private Health Insurance:  Declining Employer Coverage May Affect
    Access for 55- to 64-Year-Olds (GAO/HEHS-98-133, June 1, 1998).

    Health Insurance Standards:  Implications of New Federal Law for
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    Health Insurance Standards:  New Federal Law Creates Challenges for
    Consumers, Insurers, Regulators (GAO/HEHS-98-67, Feb.  25, 1998).

    The Health Insurance Portability and Accountability Act of 1996:
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    Private Health Insurance:  Continued Erosion of Coverage Linked to
    Cost Pressures (GAO/HEHS-97-122, July 24, 1997).

    Retiree Health Insurance:  Erosion in Employer-Based Health Benefits
    for Early Retirees (GAO/HEHS-97-150, July 11, 1997).

    Employment-Based Health Insurance:  Costs Increase and Family
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    Private Health Insurance:  Millions Relying on Individual Market Face
    Cost and Coverage Tradeoffs (GAO/HEHS-97-8, Nov.  25, 1996).

    Health Insurance Regulation:  Varying State Requirements Affect Cost
    of Insurance (GAO/HEHS-96-161, Aug.  19, 1996).

    Health Insurance Portability:  Reform Could Ensure Continued Coverage
    for Up to 25 Million Americans (GAO/HEHS-95-257, Sept.  19, 1995).

    Employer-Based Health Plans:  Issues, Trends, and Challenges Posed by
    ERISA (GAO/HEHS-95-167, July 25, 1995).

    Health Insurance Regulation:  Variation in Recent State Small
    Employer Health Insurance Reforms (GAO/HEHS-95-161FS, June 12, 1995).

    Employer-Based Health Insurance:  High Costs, Wide Variation Threaten
    System (GAO/HRD-92-125, Sept.  22, 1992).

    *** End of document. ***