Included in Friday Links (November 10) was the title, “Would coverage for gene therapies make employer-based health insurance unaffordable?” That raises an important question: How much should employers (and employees) be required to pay for hyper-expensive therapies very few people need? A related question: should the purpose of employee health coverage be to recruit and retain workers or fund rare disease research and therapies?
The post is about an article appearing in Health Affairs Scholar. The authors wrote:
When the first discoveries in gene therapy appeared in the mid-2010s, concerns were raised about whether health insurance plans in the United States could sustain payment of such large one-time costs per patient treated, especially as more treatments appear over time.
Yet, the authors of the Health Affairs Scholar article conclude that million-dollar gene therapies are really no big deal.
From the viewpoint of insurance theory and empirical evidence, we conclude that these concerns are overstated for the vast majority of workers in competitive labor markets with group insurance in the United States. After all, the primary goal of insurance, in theory, is converting a large, unexpected, unaffordable, but rare expense into a moderate insurance premium, by spreading an individual large expense over many premium payers.
The history of employee health coverage goes back to World War II when there were wage and price controls in effect. The story goes that shipbuilder Kaiser wanted to offer health benefits since it could not raise wages to retain and recruit workers. The National War Labor Board gave it permission and a decade later Congress confirmed that employee health benefits were nontaxable. This 80-year history of tax exclusions for employee health plans is why most families under age 65 get private health insurance through an employer.
Prior to the Affordable Care Act (ACA) most health insurance policies had both annual and lifetime caps on benefits. That is, an enrollee could be limited to no more than, say, $500,000 in benefits in a calendar year and could be further limited to a lifetime limit of, say, $1 million to maybe $2 million in total benefits. The ACA banned annual and lifetime limits.
At the time the ACA was passed, several benefits brokers I spoke with told me banning annual and lifetime limits on benefits would not raise premiums a significant amount. They said it was no big deal because very few enrollees ever surpass claims of more than $1 million in a calendar year. My reply was that claims exceeding the benefit caps would become much more common once the caps were removed. That is precisely what happened.
It is not really in employers’ best interest to attract workers who only want the job for the care they can obtain from health benefits. It is especially not good for employers whose workers need a million dollars in medical care. There are nearly a dozen drugs that cost more than $1 million a year, some of which are gene therapies that cost $2 million to $3.5 million for a single dose. Not many small employers can afford to pay $1 million a year for hyper expensive therapies, and it’s not just small employers.
The Health Affairs Scholar paper goes on to say that only about one-third of workers are employed in small firms and about three-quarters of those have group health insurance. The authors further estimate that only about 4.4% of workers (5.1 million) are in small firms that offer at least one self-insured plan. Of the 5.1 million workers in small firms that self-insure, 2.1 million are employed by firms that do not buy stop-loss coverage.
Firms that self-insure take on the risk of employee health costs, assuming actual medical costs will be lower than health insurance premiums. These plans are managed by third-party administrators, which are often health insurance companies. Firms that self-insure often purchase stop-loss coverage that assumes the risk of extremely high medical claims for any one employee and claim costs in excess of a predetermined amount.
As was mentioned above, not all small firms that self-insure purchase stop-loss coverage. That puts these firms on the hook for greater than average health costs. Furthermore, firms that purchase stop-loss coverage face premium hikes that have far outpaced the fast-rising cost of employee health coverage. Between 2012 and 2022 health coverage for large, self-insured firms rose 43%. By contrast, the stop-loss premiums (to limit exposure to extreme risks) have risen by 138%. That disparity alone illustrates that greater-than-average claims are rising, which undermines that argument that expensive therapies are affordable for employer plans.
The cost of employee health insurance is mostly borne by workers in the form of reduced wages and direct contributions. To the degree that workers refuse to absorb excess costs in the form of reduced wages, the difference reduces employer profits. The authors use as evidence that employers can absorb the cost of expensive gene therapies because only about 1.8% of workers are in small firms that lack stop-loss coverage. Small firms create more jobs, expand faster and contract faster than large firms. Thus, putting small firms at risk comes with greater risks to the economy. It also ignores the question of whether it is good public policy to fund multimillion-dollar rare disease therapies through employment.