Expanding Health Insurance Coverage in Georgia

By William S. Custer

There are two primary reasons why the number of Georgians without health insurance is an important public policy issue. First, there is a public health concern that lack of health insurance may result in sicker, less productive individuals. Second, health care is not denied to those without health insurance. In fact, they consume a considerable amount of health care resources. The cost of treating the uninsured is borne by taxpayers, by purchasers of private insurance, by providers, and by local communities. These costs are not distributed efficiently or equitably.

The uninsured face a much different process of health care than those with insurance. They are much less likely to have a usual source of care, more likely to receive care in an emergency room or a hospital outpatient department, and less likely to be admitted to a hospital. However when they are admitted to a hospital the uninsured are more likely to experience avoidable admissions, or admissions that could have been treated on an outpatient basis had they been diagnosed early enough, and are likely to be more severely ill upon admission. Once admitted to the hospital, studies have found that the uninsured are likely to have shorter lengths of stay than privately insured individuals with similar conditions. Finally, the uninsured are more likely to have adverse results and higher mortality rates even after adjusting for the severity of illness.

Eighty-one percent of Georgians under the age of 65 had some form of health insurance coverage in 1998. (Table 1) Sixty-three percent of those Georgians received their coverage through an employment-based plan. Of those non-elderly Georgians with employment-based health benefits, slightly more than half (2.3 million people) received coverage from their own employer, while the remainder were covered under someone else’s plan. Approximately 18 percent of non-elderly Georgians received coverage from some public source (Medicare, Medicaid, or Champus), primarily Medicaid. Nineteen percent of non-elderly Georgians were without any health insurance coverage in 1998.

Table 1

Health Insurance Coverage in Georgia, 1998

                                          Total                        Non Elderly                        Elderly

                           Individuals  Percent   Individuals   Percent   Individuals   Percent

Total                  7,624,322       100%   6,881,232             100%     743,090          100%

Total Private    5,193,756         68%   4,729,729               69%     464,026            62%

  Employer       4,602,795         60%   4,344,709               63%     258,085            35%

    Direct            2,545,235         33%   2,345,947               34%     199,288            27%

    Indirect         2,057,560         27%   1,998,762               29%       58,797              8%

  Other Private    628,487           8%      422,545                 6%     205,941            28%

Total Public     1,920,499         25%   1,213,579               18%     706,920            95%

  Medicare           863,436         11%      156,516                 2%     706,920            95%

  Medicaid            960,075         13%      882,425               13%       77,650            10%

 Uninsured       1,341,265         18%   1,341,265               19%                                 0%

Several factors affect the source of an individual’s health insurance coverage. Many individuals may rationally choose not to purchase health insurance coverage, in part due to low income and in part due to their own perception that their risks of needing health care services are low. Eligibility for public programs varies with income and other characteristics. Similarly, many employers choose not to provide health benefits to their employees because they face higher costs in providing these benefits than do their competitors and/or because their work force does not strongly demand it.

The primary reason for the increase in the number of Americans without health insurance over the last 15 years is the increase of health care costs relative to family income. Just as national health care expenditures have increased as a proportion of Gross Domestic Product, personal health care costs have increased as a proportion of families’ budgets. As these costs increase, families decrease their purchase of health care services and especially health insurance. Insurance is a hedge against the likelihood that an individual or a family will need health care services. The two groups most likely to reduce their purchase of health insurance are therefore those whose family incomes are low and those whose risks of needing health care services are low. In the labor market, those workers will seek out jobs where compensation is weighted toward cash and not health benefits.

Perhaps the most important determinant of the health insurance coverage is family income. The probability that an individual has employment based health insurance coverage increases steadily with income, while the probability that they are uninsured decreases with family income. Almost ninety percent of Georgians whose families have incomes greater than $50,000 annually have private health insurance, and 8 percent of those Georgians are uninsured.

Table 2

Insurance Coverage by Family Income as Percentage of the Federal Poverty Level

Non-elderly Georgians, 1998

                                                                                    400%or

                              Total         0-99%    100%-199%   200%-399%         more

Total             6,881,232     984,856     1,210,832        2,227,172      2,458,372

Total Private 4,729,729    182,850        641,872        1,684,100      2,220,908

  Employer   4,344,709     138,458        557,583        1,580,737      2,067,932

  Other Private 422,545       50,392          95,187           123,989          152,976

Total Public 1,213,579     481,968        273,734           268,530          189,347

  Medicaid       882,425     455,388        228,541           137,091            61,406

Uninsured   1,341,265     353,293        375,423           424,950          187,600

Percentage within Family Income Categories

                                                                                                                       400%or

                              Total         0-99%    100%-199%   200%-399%         more

 Total                        100%         100%            100%               100%              100%

Total Private            69%            19%               53%                  76%                90%

  Employer                63%            14%               46%                  71%                84%

  Other Private            6%              5%                 8%                    6%                  6%

Total Public              18%            49%               23%                  12%                  8%

  Medicaid                 13%            46%               19%                    6%                  2%

Uninsured                19%            36%               31%                  19%                  8%

                                        

Percentage within Coverage Categories

                                                                                                                       400%or

                              Total         0-99%    100%-199%   200%-399%         more

Total                        100%            14%               18%                  32%                36%

Total Private          100%              4%               14%                  36%                47%

  Employer              100%              3%               13%                  36%                48%

  Other Private       100%            12%               23%                  29%                36%

Total Public           100%            40%               23%                  22%                16%

  Medicaid               100%            52%               26%                  16%                  7%

Uninsured              100%            26%               28%                  32%                14%

Source: Tabulations of the March 1999 supplement to the Census Bureau’s Current Population Survey

Note: The totals for insurance coverage categories may exceed 100% because individuals may have multiple sources of coverage. In contrast, only 10 percent of Georgians whose families earn less than $5,000 annually have employer coverage, and almost 44 percent of them are uninsured. Individuals in families earning less than $10,000 annually account for 18 percent of Georgia’s uninsured population.

Family income is often expressed as a ratio to the Federal government’s poverty level. The poverty level is determined in part by the size of the family, so examining the sources of health insurance coverage by this ratio presents a clearer picture of the relationship between a family’s disposable income and health insurance coverage. Those individuals whose families have incomes just above the Federal poverty rate are more likely to be uninsured than those in the income categories just above and below them. Just over half of those Georgians living in families with incomes below the poverty level receive public coverage while a third of them are uninsured. (Table 2) Sixty-one percent of Georgians without health insurance live in families whose incomes are less than twice the Federal poverty rate.

Options for Increasing Health Insurance Coverage

Policies intended to increase the number of Georgians with health insurance coverage redistribute the costs of health care services. The goal of these policies should be to decrease the total costs the uninsured impose on Georgians through increased taxes, insurance premiums, and costs of health care. It is important to understand the market for health insurance in evaluating the effect of any proposed measure on the number of uninsured and the total costs of coverage.

The primary reason for the increase in the number of individuals without health insurance over the last 15 years is the increase of health care costs relative to family income. Just as national health care expenditures have increased as a proportion of Gross Domestic Product, personal health care costs have increased as a proportion of families’ budgets. Premiums are a function of expected health care costs. As these costs increase, families decrease their purchase of health care services and especially health insurance.

Insurance is a hedge against the likelihood that an individual or a family will need health care services. The groups most likely to reduce their purchase of health insurance are therefore those with low family incomes, those who face high insurance premiums, and those individuals whose risks of needing health care services are low.

There are four broad categories of proposals to expand access to health care services. They are:

• Subsidize the purchase of private health insurance.
• Regulate the private health insurance market in an attempt to stabilize and lower health insurance premiums.
• Expand public programs such as Medicaid, or Peachcare (Georgia’s Children’s Health Insurance Program).
• Subsidize the provision of health care services to the uninsured.

These categories are not mutually exclusive and, in fact, many proposals combine two or more of these approaches, but each of them relies on distinctively different methods for increasing coverage.

Subsidizing the Purchase Of Private Health Insurance

The primary source of health insurance for Georgians is employment-based plans. Of those with coverage, 78 percent of Georgians get their health insurance through an employer. Employment is clearly an important determinant of the source of health insurance coverage. Seventy-four percent of Georgians who live in a family headed[1] by a full-time, full year worker have employment-based health insurance. That percentage falls to 35 percent for those whose family heads experienced some unemployment during the year, and to just under 19 percent for those families headed by a non-worker.

One of the factors driving the importance of employment in health insurance coverage is the tax treatment of health insurance as an employee benefit. Employer contributions for employee health insurance are excluded from income for the purpose of determining payroll taxes and federal and state income taxes. The effect of this exclusion is a subsidy for the purchase of health insurance for those individuals receiving coverage through the work place.

The employment-based health system allows risks to be pooled more broadly than an individual insurance market can sustain. An individual’s choice of health insurance coverage in an individual market is determined by his self-assessment of his own risks and income. As a result, those with the greatest demand for health insurance are those most likely to use health care services. Premiums in the individual market are therefore higher to cover the costs of the greater risks.

Employer health plans are offered to employees and their dependents as a portion of a compensation package. The individual’s self-assessment of his own risk is only one of a set of factors that leads him to accept or reject a job offer. As a result, more good risks remain in the employer’s risk pools reducing the effective premium and making employment-based health insurance more cost effective than the alternatives.

The exclusion of the value of the employer contributions for health benefits from an employee’s income for tax purposes lowers the effective costs of health insurance for employees and increases health insurance coverage. Tying the exclusion expressly to employment-based plans provides an incentive for good risks to stay within the group further increasing health insurance coverage.

An employer’s decision to offer health insurance will depend upon the demand for health insurance by the workforce the employer wants to attract and retain. Controlling for income, generally good risks will have a lower demand for health insurance than poorer risks. Increasing the tax preference for health insurance lowers the effective price of that coverage inducing more good risks to demand employment-based coverage. Regardless of the rule the employer uses in choosing whether or not to offer coverage, the greater the demand for it by workers, the more likely employers are to offer coverage.

Public policies that provide subsidies to individuals to purchase health insurance coverage outside the employment-based system may have the effect of reducing health insurance coverage, especially among those with higher risks of needing health care. This can occur because subsidies weaken the good risk’s demand for employer-sponsored health benefits because they are more likely to get good rates in the individual market. Poor risks lose the benefit of risk pooling and face higher premiums, increasing the number of uninsured among exactly that population most likely to use health care services.

One of the factors affecting the costs of health insurance is firm size. Smaller employers may face higher costs for providing health benefits than larger firms for three reasons. First, their small size means that they are less able to spread risks. Second, their small size makes it harder for them to self-insure and avoid costly state mandates and taxes. Finally, they face higher administrative costs since they are less likely to have staff devoted to health benefits.

Only about 44 percent of non-elderly Georgians whose family head is employed by a firm with less than 25 employees has employment-based health benefits, while over 77 percent of the individuals whose family heads are employed by firms with more than 1,000 employees have employment-based coverage. Individuals in families whose greatest earner is employed by the smallest firms are much more likely to purchase coverage outside the employment setting or to receive coverage from another member of the family.

While small employers face higher costs for providing similar health benefits than larger employers, they are also more likely to hire low wage workers. Small employers, especially those under 10 employees, are more likely to higher workers from low-income families. Family income, rather than the workers’ wage, is important because it is a family decision to purchase health insurance or to pursue employment with an employer that offers coverage.

There are a number of proposals that attempt to address this disparity in costs of coverage between large and small employers. One method is to directly subsidize the purchase of health insurance for employees of small employers. There are two drawbacks with this approach. First, the amount of the subsidy needed to significantly reduce number of uninsured Georgians is likely to be large. Using national data, cost estimates run between $55 and $88 million to induce between 81,000 and 130,000 previously uninsured Georgians to purchase insurance.

Second, it is difficult to design a subsidy that excludes those employers who now provide health insurance coverage from participating in the subsidy program. Allowing them into the program significantly increases the costs per newly insured individual of such a program. Offering the subsidy only to those employers not now offering coverage raises equity questions as well as providing an incentive for employers now offering coverage to drop it until they become eligible for the subsidy. This could increase the costs of such a subsidy tenfold.

An alternative is to target the subsidy to employer’s low-income workers. This type of subsidy has several advantages. First, it targets the low-income workers who are most vulnerable to non-coverage. Using the employer as a vehicle for subsidization avoids the cash flow problems low-income workers might face from a tax credit program. Finally, the private insurance market can be used to provide these benefits as efficiently as possible.

There are several disadvantages of this type of subsidy, however. One is that employers would be required to document employee family incomes. Employers may be reluctant to collect such information. A similar disadvantage is the administrative burden of reaching individuals through their employer. This may limit the number of employers who participate in such a program.

Regulate the private health insurance market

States have traditionally regulated health insurance markets. While many Americans have insurance coverage through employee benefit plans that are exempt from state regulation under the Employee Retirement Income Security Act (ERISA), state regulation is an important determinant of the structure of the small group and individual insurance markets.

A number of states have implemented legislation aimed at improving access for individuals seeking coverage in the small group and individual health insurance markets. The legislation attempts to correct some of the well-known and predictable problems associated with those markets: experience rating that leads to unaffordable premiums for those with known health risk, denial of coverage or incomplete coverage for those with preexisting conditions, and policies that are designed with limitations on care that either restrict access to necessary care or make policies unattractive to high risk/high cost enrollees. Efforts by state legislatures to remedy these problems have resulted in various patterns of state laws that attempt to do the following:

• Guaranteed issue and guaranteed renewal laws attempt to deal with the practice of denying coverage or denying continuation of coverage for individuals with known illnesses and/or risk factors.

• Rating bands and mandated community rating attempt to deal with the problems associated with skyrocketing premiums for groups which include individuals who are predictably high cost beneficiaries, or in the individual market, for individuals with preexisting conditions or risk factors.

• Mandated benefits legislation attempts to force insurers to offer complete coverage and to prevent the use of policy design to appeal to the lowest risk consumers.

These legislative reforms attempt to expand access to coverage for the high-risk individuals, make coverage affordable for high-risk individuals, and ensure that covered individuals have access to necessary services.

The two types of state regulation that have had the greatest effect on the structure of local health insurance markets are coverage mandates and small group reforms. Coverage mandates require that certain services or providers be covered in any insurance product sold within a state. Small group reforms include health insurance rating and renewing, and the creation of risk pools for uninsurable individuals. States that have implemented rating reforms, either restrictions on premiums into bands, or some form of community rating, have coupled these reforms with guaranteed issue.

In a study done at Georgia State University, high risk pools were associated with increased health insurance coverage, decreasing the probability of an individual being uninsured by 1.5 percent. Rating bands and community rating were associated with increased probability that individuals were uninsured, increasing the probability of being uninsured by between 5 and 28 percent. Rating bands with guaranteed issue had the smallest impact in the individual markets. Finally, mandates that insurance plans cover mental health increased the probability of being uninsured by almost 6 percent.

The reason these laws increase the number of uninsured is that they increase the costs of coverage. As a result, the better risks are more likely to drop coverage. However, some poorer risks may gain coverage because of these laws.

These laws attempt to restructure the small group markets in an attempt to mimic the advantages that large employers enjoy in the purchase of health insurance coverage for their employees. Various forms of purchasing cooperatives have been suggested as a means of allowing small groups to obtain coverage at similar rates to large employers.

The basic premise of purchasing cooperatives is that small groups can pool together to realize the same economies of scale in purchasing that large employers enjoy. Within that general idea, there are many different models for these purchasing cooperatives. These purchasing cooperatives can be private, quasi-public, or public entities. In some models, purchasing cooperatives actually negotiate with health insurers on behalf of the member employees. In others, the purchasing cooperative sets the market. That is they set the rules for the markets, facilitate the exchange of price and quality information, and allow consumers to choose the health plan the best fits their needs.

Insurance purchasing cooperatives can reduce marketing and other administrative costs to small groups and may strengthen the ability of small groups to negotiate lower premiums with insurers. Moreover, cooperatives may allow small employers to offer a choice of health plans to their employees that they are unable to offer as a single purchaser.

While the potential for reducing administrative costs exists, there is little or no evidence that significant cost savings have been achieved under existing small employer purchasing cooperatives. Without substantial inducement to participate in purchasing cooperatives, small employers are likely to consider them as just another potential source of coverage. As a result, attempts to pool risks will be unsuccessful, since good risks will find it less expensive to purchase health insurance outside the pool.

Expanding Public Programs

The two major public programs in Georgia for providing health insurance are the Medicaid program and Peachcare. There are several advantages for providing coverage for the uninsured through these programs. First, 54% of the uninsured live in families with incomes below 200% of poverty (about $33,000 annually for a family of four). These families are unlikely to purchase health insurance without substantial subsidies. The existing public programs are already in place to serve this population and the special needs they might have. In both of these programs, state funds are matched by Federal funds. This obviously increases the number of uninsured Georgians that could be covered under these programs.

The Federal match may also be one of the drawbacks to this approach. The Federal government imposes a number of regulations on how these programs are implemented and administered. Most innovations in these programs require a waiver in order to be implemented. The political process at both the Federal and the state level may reduce the flexibility of the program to adapt to the changing health care delivery system.

Medicaid has historically had one of the lowest reimbursement rates for providers nationally, and as a result, several studies have found that Medicaid recipients receive lower quality care than privately insured individuals.[2] It is debatable whether increasing the share of provider revenue coming from the Medicaid programs strengthens or weakens providers, particularly rural hospitals.

Subsidize the provision of health care services

Traditionally, the care for the uninsured has been paid for by explicit or implicit subsidies to health care providers. The explicit subsides consist of specific payments in public programs such as Medicare and Medicaid, or in the form of tax payments to public hospitals. Implicit subsidies were paid by increased insurance premiums or higher prices for health care services paid by insured payers.

Public programs and private health plans have evolved rapidly in the last 15 years in response to health care cost inflation. Efforts to manage health care costs have been a major factor in the restructuring of the health care services market. The result has been a decrease in both the explicit and implicit subsidies paid to providers for the delivery of uncompensated care.

The financial pressure on hospitals and other traditional providers of care to the uninsured has led to a decrease in access to care. The existing financing through public programs for uncompensated care to hospitals often results in the care being provided in the most expensive sites for conditions that could have been treated less expensively or avoided altogether.

Given the difficulty in inducing individuals to purchase health insurance in a voluntary market, a more efficient use of scarce health care resources might be to directly subsidize some set of primary care services that have been shown to decrease hospital and other expensive modes of health care services. This approach has the benefit of limiting the services covered to only those shown to be effective in reducing total health care costs and increasing health.

There are a number of practical issues in administrating this program. First, while the set of services covered can be limited by budget constraints, there would be considerable pressure to include a widening group of services. The amount of pressure would be determined by the reimbursement mechanism employed to pay for these services. That reimbursement mechanism would need to be generous enough to induce providers to participate, but constructed to avoid unintended incentives to provide too much or too little care. Such a program may require the creation of local provider networks with case managers who can coordinate care for the uninsured.

Conclusion

Rising health care costs and public policy have resulted in an increasingly segmented health insurance market, reducing the number employers, especially small employers, to offer health insurance as an employee benefit and also resulting in an increase in the number of Americans without health insurance coverage.

Extending health insurance coverage to the uninsured is a daunting public policy challenge. In the last four years of constant economic growth the percentage of Georgians without health insurance has continued to slowly grow. It is unlikely that any single national policy will achieve universal coverage. States with more limited resources have a correspondingly limited set of options for addressing the uninsured. All choices for addressing the uninsured involve reallocating health care resources. The goal of any public policy should be to allocate those scarce resources efficiently and equitably.

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Appendix

The figures in this report are tabulations of the March 1999 supplement to the Census Bureau’s Current Population Survey. In March of each year the Census Bureau surveys approximately 57,000 households across the nation, receiving information on about 140,000 individuals, about 1,500 of them Georgians. Respondents were asked about their health insurance coverage for the preceding year. It is possible for individuals to correctly state that they had several sources of coverage, so the percentages reported here may not total to 100. The Current Population Survey consistently under-reports the number of individuals on Medicaid based on state and Federal Medicaid reports.

[1] The family head is defined as the family member with the greatest earnings.

[2] U.S. Congress, Office of Technology Assessment, Does Health Insurance Make a Difference? -Background Paper, OTA–BP-H-99 (Washington, D C: US Government Printing Office, September,1992 p. 2

Dr. William S. Custer is associate professor in the Risk Management and Insurance Department of the J. Mack Robinson College of Business at Georgia State University.