Revisiting the Value of Lost Fringe Benefits: Medical Care and Insurance Costs

• Continuing evolution of the scope, cost and burden of medical care benefits and insurance costs.
• Growing importance of employer's company size and industry, as well as employee family size, in determining medical benefits costs.
• Increasing use of employee contribution to reduce employer's cost of medical care.

The Scope, Cost and Burden Of Medical Care, Benefits and Insurance Costs

It is well known that the rapid growth in medical care costs is an increasing burden to employers, employees and governments. Our analysis of various studies of medical care costs indicates that they have increased at 9% to 11% per year during the last five years. These increases have resulted in efforts by all concerned to mitigate these costs. A recent Bureau of Labor Statistics (BLS) study noted:

"In response to the rising costs of providing health care benefits, employers have looked for ways to share costs with workers and their families who receive the benefits. One way of sharing costs, in all types of plans, is to require employees to contribute towards the cost of their coverage. In addition, the following major medical plan provisions are traditional types of benefit cost sharing used in non-health maintenance organization plans: annual deductible, annual out-of-pocket expense maximum, lifetime maximum, coinsurance." (note 1)

Importance of Employer's Size / Industry and Employee Family Size

The 2005 BLS benefits survey reports that average employer contributions with family coverage for companies with less than 100 covered employees was $501.72. The same contribution for firms with over 100 employees was $609.43 (note 2)

The 2004 U.S. Chamber of Commerce benefits survey continues to show significant variation in the employer's contribution to medical benefits based on the industry in which it operates. This may be due to the types of plans offered to employees.

The same 2005 BLS survey reports that average monthly employer contributions to medical insurance for single person coverage was $252.22. The average monthly employer contribution to medical insurance for family coverage was $575.77 (note 3)

Increasing Employee Contribution to the Cost of Medical Care

Medical cost increases have prompted employers to use a variety of techniques to increase the employee's share of medical benefits. The recent (BLS) study also commented:

Changes in health plan features and required employee plan contributions provide insights into changes in health care cost sharing between employers and employees. BLS data on benefits show that employees increasingly were required to make contributions for their coverage, that these contribution amounts have risen, and that medical plan deductibles have increased over the years (note 4)."

Our Approach to Valuing Medical Benefit Losses

These trends have impacted the way many economists value fringe benefits. Our approach now reflects many of the trends discussed above. However, there still is insufficient information to quantify the impact of a number of developments. Our primary approach, which remains unchanged, is to rely on the information provided by the employer on the actual cost of the benefits for the employee. This information permits determination of the current cost of benefits on a specific employer-cost basis. It does not include actual benefits received nor employee contributions.

When some or all of the benefits-specific information is not available, we rely on appropriate, best publicly available data to estimate the cost of medical insurance benefits. Insurance premium payments may include medical, dental, vision and/or prescription drugs coverage. We base the current year cost of these benefits on the employer contribution for the average worker in the same industry (note 5). This cost is then adjusted for the coverage category (note 6). Future values for each benefit are obtained by increasing the base year amount by the long-term historical growth rate in the appropriate Consumer Price Index (note 7).

Keeping Pace

In the absence of specific employer information, our revised medical benefits approach enables us to provide a more reliable estimate of the value by incorporating the best available public data on benefits costs and burdens into our calculations.

Notes:

1 Bureau of Labor Statistics (BLS), C. A. Baker, "Cost Sharing in Medical Insurance Plans" posted on www.bls.gov on March 31, 2004.

2 BLS, National Compensation Survey, Employee Benefits in Private Industry in the United States, March 2005, Summary 05-01.

3 ibid

4 BLS, Baker, ibid

5 U.S. Chamber of Commerce, The 2004 Employee Benefits Study, Tables 3 and 5. The survey of employee benefits is reported on an employer cost basis as a percentage of payroll money earnings. The survey consists of responses from 623 companies employing 805,187 full-time equivalent workers.

6 Coverage categories are based on family status. Adjustments are made based on single or family coverage provided by the employer. Adjustments are based on analysis of coverage data obtained from BLS Summary 05-01, National Compensation Survey: Employee Benefits in Private Industry in the United States, March 2005, Tables 11 and 12

7 Information on these indices retrieved from www.bls.gov/cpi.