Health Insurance Benefits: A Moving Target

July 2008

An enduring feature of the health care system is continual change. Whether in the clinical or the administrative setting, change is ubiquitous. For example, health insurance benefits continue to evolve by expanding, contracting, and transforming over time.

Historical Context

While many European countries had some form of compulsory, nationalized health insurance by 1920, the United States did not. There was little support for such legislation and, in fact, strong opposition by physicians, pharmacists, and commercial insurance companies.1 However, as the demand and cost of medical care increased, insurance became an attractive solution to ensure that people could pay their medical bills. Blue Cross and Blue Shield led the way in providing group health coverage in the 1930s. Coverage focused primarily on hospital and physician services.

Insurance coverage in the U.S., for the most part, is obtained through employers. The employer-based system was established during World War II when wage and price controls prevented competition for labor on the basis of increased wages; however, employee insurance plans could be established. The favorable tax treatment of employer contributions to employee health insurance plans further cemented this relationship. Employer-based insurance is more accessible for full-time employees and employees of larger firms. Small employers are less likely to offer coverage to their employees and, when they do, benefits are typically less comprehensive than those offered by large employers. There is also an individual insurance market; however, it is small and is used most often as a bridge between spells of more affordable employer coverage.2 In the mid-1960s, the Medicare and Medicaid programs were launched. Medicare provided the elderly with a uniform set of national benefits and eligibility standards. Under Medicaid, which was created to provide insurance for the poor and disabled, benefits and eligibility varied by state. More recently, public coverage for children was expanded through the State Children's Health Insurance Program (SCHIP).

Health maintenance organizations (HMOs) with their structured benefit designs and limited networks took hold in the 1980s. HMOs expanded health care benefits to include pharmaceuticals and preventive care. The recognition that lifestyle is one of the primary contributors to health has led some employers to include wellness programs among their health benefit options. Smoking cessation programs and financial incentives for completing health risk assessments and enrolling in weight-loss programs are among benefits employers are starting to offer their employees.3 The take-up and success of these types of benefits are yet to be realized. Preventive care, care management, and pharmacy plans became more common in the last several years, even in indemnity plans, and in 2003 legislation provided for a pharmacy benefit under Medicare.

Recently, the rapid growth in health care costs has spawned innovations regarding benefit design and cost-sharing provisions as payers try to temper health care cost increases.4 Some employers are "thinning out" the coverage available to employees or moving to more catastrophic-focused benefit options.5  

Out-of-pocket spending

Modifications in benefit structure have included attendant changes with respect to consumers' out-of-pocket spending. Simply put, individuals have been paying more for coverage. Starting in the 1980s, employers increasingly shifted premium costs to employees in an effort to slow their own costs as well as to try to make their employees more cost-conscious when selecting among plans.6 At the same time, as noted above, benefits expanded to include services that previously were not covered by insurance but paid entirely by individuals out-of-pocket.7  

Recently, HCFO funded Bradley Herring, Ph.D., Johns Hopkins University, to measure the extent to which premium increases are borne by workers in the form of lower wages relative to the extent to which they are borne by employers in the form of lower profits. 

Consumer-Driven Health Plans/HSAs/High-Deductible Plans

In the last few years, the concept of "consumerism" has become popular and consumer-directed health plans (CDHPs) are being offered as a benefit model for those who want more control over their health care decisions. They are also seen as a way to reduce the employer contribution to health insurance. CDHP designs vary, but generally include a high-deductible plan with a tax-advantaged health reimbursement account (HRA) or health savings account (HSA) that is used by the enrollee to pay for some portion of their health care expenses. CDHPs also commonly include a Web-based decision-support tool, which is designed to assist enrollees in making cost-effective, high-quality purchasing decisions.8

HCFO researchers are making significant contributions to the knowledge base on this relatively new benefit model. Arnold Milstein, M.D., of Mercer Human Resources Consulting examined early evidence about the effect of consumer-driven benefits on cost and quality. In 2004, he reported that while CDHPs were growing, they remained few in number as compared with more traditional benefit plans. He also reported that the decision-support tools were lacking and needed more attention to ensure overall success of these types of plans.9 In more recent work, Stephen Parente, Ph.D., of the University of Minnesota has conducted a number of analyses examining the factors affecting the choice of individuals into CDHPs, as well as the impact of these plans on quality of care, cost, and utilization. Early results showed that consumer-driven plans did not attract a significantly healthier risk pool, that the CDHP population comprises high utilizers of care, and that satisfaction was similar to other health plan enrollees.10

In related work, HCFO grantee Alison Galbraith, M.D., of Harvard Pilgrim Health Care, Inc. is analyzing the impact of high-deductible health plans on families with chronic conditions. Insofar as a growing number of employers are offering high-deductible plans, findings from this study will provide important and unique insight into the decision-making process for individuals who enroll in this type of health plan. Finally, HCFO researcher James Cardon, Ph.D., of Brigham Young University is exploring how HSAs and various tax-based health insurance proposals affect the uninsured and group market.11


Spending on prescription drugs contributes to the rise in total health care costs. To address these increases, drug benefits have been modified through a variety of tiered formulary structures. For example, some insurers tier drugs and include or exclude coverage based on distinctions such as whether a drug is brand-name or generic. A drug benefit may specify that a consumer will be charged a higher co-pay within a certain tier, or that the entire cost is out-of-pocket. Richard Frank, Ph.D., and colleagues at Harvard University conducted a HCFO-funded study examining the effects of incentive-based formularies and found that the ways in which formulary changes are structured may have dramatically different effects on drug utilization and spending. Moreover, they found that some formulary changes may lead enrollees to discontinue therapy.12

Another drug benefit change that some states have tested is monthly refill limitations. HCFO grantee Marisa Domino, Ph.D., at the University of North Carolina at Chapel Hill examined the impact of supply restrictions for pharmacy benefits in the Medicaid program in North Carolina on medication adherence, health services use, and cost to the Medicaid program. Preliminary findings suggest that while there seemed to be some savings for Medicaid, it came at the expense of lower adherence.


Tiered network plans, in which hospitals and/or physicians are grouped into one or more categories, are also a tool that insurers have used to better manage care and costs. Deductibles, co-pays, and co-insurance are then structured to encourage enrollees to use providers in preferred tiers. As with tiered formularies, the tiering of providers is designed to reduce costs and encourage enrollees to use high-quality providers. HCFO researcher J. William Thomas, Ph.D., at the University of Southern Maine notes that this type of benefit restructuring is relatively new. He found that more information is needed to better understand the implications, and while there is some limited evidence to suggest that tiering providers may control health care cost increases, tiering does not appear to have an impact on quality of care.13

Benefit Issues on the Horizon

A study by the Center for Studying Health System Change finds that employers are just beginning to experiment with innovative benefit designs, including implementing incentives to encourage the use of higher performing physicians.14 How value-based purchasing may ultimately affect plan structure and benefit packages is yet unknown.


Recently, the Employee Benefit Research Institute reported Towers Perrin survey results that found that large employers are in favor of continuing their role in providing health insurance. While they are interested in benefit changes that will help to reduce costs, there is a lack of consensus on the right reform structure and, therefore, little expectation that comprehensive change is imminent.15 As in the past, health insurance benefits are likely to continue evolving incrementally.

The following are select grants from HCFO's portfolio that address issues related to benefit change. For other HCFO grants, see

Title: Health Savings Accounts, High-Deductible Policies, and the Uninsured: Simulating the Effects of HSA Tax Policy
Institution: Brigham Young University
Principal Investigator: James Cardon, Ph.D.
Duration: November 2007-December 2008

The researchers are exploring how Health Savings Accounts (HSA) and various tax-based health insurance proposals affect the uninsured population. They also will simulate how tax-deduction and credit policies for non-group insurance affect the employment-based group market. Through an innovative approach, the model will consider employer choice and individual preferences in the face of the risk of uncertain medical expenditures. The behavior of three important consumer groups will be examined: 1) the currently uninsured who do not have access to group coverage; 2) the currently uninsured who have access to group coverage but choose to be uninsured; and 3) the currently insured group in group coverage. The researchers will model a variety of policy changes and assess the value to each consumer group and the likelihood of changing from the status quo. The objective of this project is to inform policymakers about the impact of HSAs and various tax-based health insurance proposals on the uninsured and group market. 

Title: How Do Rising Health Care Costs Affect Worker Compensation?
Institution: Johns Hopkins University (Bloomberg School of Public Health)
Principal Investigator: Bradley Herring, Ph.D.
Duration: November 2007-October 2008 

The researchers will measure the extent to which increases in health insurance premiums are borne by workers in the form of lower wages relative to the extent to which they are borne by employers in the form of lower profits. They will also examine whether there are significant differences in this relationship between small and large firms and between low- and high-income workers. Finally, they will examine the extent to which any wage offsets vary by the expected health care costs across groups of workers with different characteristics, such as age, gender, health status, and family size. The objective of the study is to better understand where the burden of rising health care costs falls, so as to develop appropriate policy incentives. 

Title: Study of the Effects of High-Deductible Health Plans on Families with Chronic Conditions
Institution: Harvard Pilgrim Health Care, Inc.
Principal Investigator: Alison Galbraith, M.D.
Duration: February 2007-July 2009

This project is analyzing the impact of high-deductible health plans on families who do not have a choice in health plans. The researchers will examine the effect of high deductibles on family health care decision-making strategies, unmet health care needs, and the financial burden for families relative to that of traditional plans. They will also explore whether one family member's health or resource use influences that of other family members, particularly when one member has a chronic condition. The objective of the project is to inform policymakers about the potential advantages and disadvantages of high-deductible plans for families dealing with chronic conditions, especially when they have no choice in health plans.

Title: The Impact of Multiple Consumer-Driven Health Plans Beyond Early Adoption: Here to Stay or Market Fad?
Institution: Regents of the University of Minnesota
Principal Investigator: Stephen M. Parente, Ph.D.
Duration: December 2004-March 2008

How will consumer-driven health plans (CDHPs) affect quality of care, cost, and utilization of health care in the long-term? Will the impacts vary by CDHP design? Researchers from the University of Minnesota are exploring the long-term impact of CDHPs, specifically their impact on quality of care, cost, utilization, and variation in these outcomes by different CDHP designs, including Health Savings Accounts (HSAs). Building on their current HCFO grant, the researchers are examining claims and employer data from the six employers included in their ongoing study (offering Definity Health) and six new employers using CDHPs from Destiny Health, Blue Cross Blue Shield, and UnitedHealth Group. They are examining four research questions: 1) What is the long-term effect of CDHPs on health care cost and use? 2) Are other CDHPs, including newly legislated HSAs, producing different results than Definity Health's CDHP? 3) What is the quality of care for CDHP enrollees with chronic illnesses such as diabetes and heart disease? and 4) How do consumers manage their CDHP spending accounts in the long run, and can this knowledge be used to design an "ideal" CDHP? This study will provide objective empirical analyses of the impacts of CDHPs and newly developing HSA products on consumers. 

Title: Use of Tiered Networks by Employer-Sponsored Health Plans
Institution: University of Southern Maine 
Principal Investigator: J. William Thomas, Ph.D.
Duration: July 2004-June 2007 

What is the current or planned use of tiered hospital and/or physician networks in employer-sponsored health plans? In such networks, an individual's out-of-pocket costs differ depending on the "tier" to which the provider is assigned. This creates a financial incentive for individuals to select among providers based on the price, maximizing choice for individuals while still promoting cost savings. This study focused on tiered network design and implementation, plan marketing and enrollment, and responses to tiered networks. The objective of the project was to provide important baseline data and early impact analyses to begin tracking the evolution of tiered network products over time, allowing public and private payers to make decisions about how best to design and implement future tiered network reimbursement structures.

Title: An Early Portrait of Consumer-Directed Health Benefits: Design, Integration, Penetration, and Effects
Institution: Mercer Human Resource Consulting 
Principal Investigator: Arnold Milstein, M.D.
Duration: May 2003-December 2003

What is the prevalence of consumer-driven health benefits (CDHBs) in the market and what is the early evidence about how the movement toward CDHBs has affected cost and quality? The analyses included three categories of CDHBs: health retirement accounts, tiered or flexible benefit design products, and tiered network or treatment option models. Specifically, the researchers assessed the enrollment in and features of different types of CDHBs, as well as the effects of these newly introduced products. They also generated hypotheses about the longer term prospects and impact of CDHBs and derived policy recommendations aimed at maximizing the value of CDHBs. This study provides purchasers and other private and public decisionmakers with early information about what consumer driven health benefit plans are and how they affect cost and quality.

Title: Evaluation of Defined Contribution Plans on Health Insurance Choice and Medical Care Use
Institution: Regents of the University of Minnesota
Principal Investigator: Stephen M. Parente, Ph.D.
Duration: November 2002-April 2005

Consumer-driven health plans (CDHPs) have emerged as a genuine new form of health insurance in the United States.The goal of this research was to provide early evidence of the factors affecting the choice of individuals into a defined contribution or consumer-driven health plan as well as the impact of the plans on employee cost and utilization for a set of regional and national employers. 

Title: The Impact of Pharmaceutical Formularies on Prescription Drug and Health Care Costs and Utilization
Institution: Harvard University
Principal Investigator: Richard G. Frank, Ph.D.
Duration: May 2001-April 2004

What are the effects of a health plan instituting a three-tiered co-payment (TTCP) financing mechanism on prescription drug spending, total health care spending, and patients' compliance with treatment protocols and quality of care? The study, conducted by researchers at Harvard University in conjunction with Merck-Medco, involved an analysis of Merck-Medco administrative, medical and pharmaceutical claims, and encounter data. The researchers investigated the effects of the three-tier co-payments on drug use and costs for both drugs and other health care services, as well as the effects of the three-tier formulary on patterns of care for patients diagnosed with depression, congestive heart failure, and hypercholesterolemia. This study informs public and private policymakers-particularly those involved in designing proposals for adding a prescription drug benefit to Medicare-on the range of implications a three-tier co-pay strategy for prescription drug cost-containment may have for patients, plans, and the market.

Title: Business Views of Strengths and Weaknesses of the Employer-Based System for Providing Health Insurance Coverage
Institution: Economic and Social Research Institute (ESRI)
Principal Investigator: Jack A. Meyer, Ph.D.
Duration: April 2000-June 2001

What role do employers play in financing health care coverage? Researchers at the Economic and Social Research Institute first conducted a literature review of writings and research on the employer-based system, which included a review of new designs for the U.S. health care system made by scholars across a broad array of organizations, as well as a review of major national surveys conducted by RAND, the federal government, and others. The literature (and proposals for redesign) on employer financing and contribution policies were also reviewed. The results of the literature review were then used to outline the kinds of issues to address in the employer interview component of the study. The researchers conducted in-depth interviews with 50 to 60 employers to elicit information on what business leaders see as the essential ingredients for reforming the employer-based system. They examined questions aimed at understanding how employers view the employer-based system, what problems it creates for them, and how they would respond to a variety of proposals to reform the system-including some that would eliminate the employer's role. The objectives of the project were to provide policymakers with better information about the strengths and weaknesses of the employer-based system, as well as the implications for the future direction of reform, focusing on whether to repair the current system or replace it with an alternative design.

Title: Consumer Choice of Plans, Employer Contribution Policy, and Health Plan Price
Institution: Institute for Health Policy Solutions
Principal Investigator: Richard E. Curtis
Duration: April 1997-September 1998

How do employer premium contribution policies and other (non-price) factors affect employee choice of multiple competing health plans in health plan purchasing cooperatives (HPCs), which allow variations in employer contribution policies while giving employees choice among multiple health plans offering the same (standardized) benefit plan designs? Researchers analyzed data collected from two sites: the Health Insurance Plan of California (HIPC) and HPC in Connecticut.They gathered information from surveys of employers and employees, centralized enrollment files, other consumer information collected by the HPC, and interviews with key actors. Multivariate analyses were conducted in order to determine the effect of premium on plan choice, the effect that employer contribution policy has on the response to higher premiums, the extent to which older workers react differently to financial incentives than do younger workers, and the qualitative non-price factors and influences that are most important in health plan choice. They also investigated whether there are differences in choice patterns between those with employee-only and those with family coverage. The goal of this project was to advise the policy and purchasing fields as to what factors affect employee behavior.

2 Kirk, A. "The Individual Insurance Market: A Building Block For Health Insurance Reform?" HCFO Report, AcademyHealth, May 2008.
3 Holland, K. "," New York Times, June 22, 2008,
4 Demchak, C. "Major Changes in Benefit Design: A Plausible Way to Control Costs?" HCFO/SCI Issue Brief, AcademyHealth, Vol. IX, No. 6, November 2006,
5 Moran, D.W. "Whence and Whither Health Insurance? A Revisionist History," Health Affairs, Vol. 24, No. 6, pp. 1415-25.
6 Farley Short, P. "Data Watch: Trends in Employee Health Benefits," Health Affairs, Vol. 7, No. 3, pp. 186-96.
7 Ibid.
8 "Consumer-Directed Health Plans, Small but Growing Enrollment Fueled by Rising Cost of Health Care Coverage," Report to the Chairman, Committee on the Budget, House of Representatives, U.S. Government Accountability Office, April 2006. Also see
9 Rosenthal, M. and A. Milstein, "Awakening Consumer Stewardship of Health Benefits: Prevalence and Differentiation of New Health Plan Models," Health Services Research, August 2004, Vol. 39, No. 4 Pt. 2, pp. 1055-70.
10 Special Issue of Health Services Research on Consumer-Driven Health Care, August 2004, Vol. 39, Issue 4p2, pp. 1049-1234 ; see also; Feldman, R. et al., "Consumer-Directed Health Plans: New Evidence on Spending and Utilization," Inquiry, Spring 2007, Vol. 44, No. 1, pp. 26-40 (finding in a comparison of CDHP plans with other plan models, that CDHP had too little out-of-pocket cost-sharing to control medical spending).
11 See also; Marchetta, M. "Health Savings Accounts as a Tool for Market Change," HCFO Issue Brief, AcademyHealth, Vol. VIII, No. 4, June 2005,
12 Huskamp, H.A. et al., "The Effect of Incentive-Based Formularies on Prescription-Drug Utilization and Spending," New England Journal of Medicine, December 2003, Vol. 249, No. 23, pp. 2224-32. 
13 Thomas, J.W. et al., "What We Know and Do Not Know about Tiered Provider Networks," Journal of Health Care Finance, Vol. 33, No. 4, June 2007, pp. 53-67.
14 Tu, H.T. and P.B. Ginsburg. "Benefit Design Innovation: Implications for Consumer-Directed Care," Issue Brief No. 109, Center for Studying Health System Change, February 2007. Also see
15 MacDonald, J.A. "The Future of Employment-Based Health Benefits: Will Employers Reach a Tipping Point?" EBRI Notes,Vol. 29, No. 2, February 2008.