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Many current health insurance reform proposals include subsidies to individuals or firms to encourage purchase of coverage. Considerable existing work suggests that the responsiveness to subsidies will be relatively small, but previous studies have not been able to separate the effects of choice of job, response to premium, and plan quality. A study by Anne Beeson Royalty and John Hagens, funded by the Economic Research Initiative on the Uninsured (ERIU), looks at employee response to health insurance and other fringe benefits in a new way. The study uses a novel data set based on employee survey responses to estimate the sensitivity of purchase decisions to price changes (subsidies). Here the plan price varies conditional on job choice, and plan quality does not vary across choices.

Employees of a single company were surveyed about their benefit choices under three premium scenarios: (1) baseline, (2) 25 percent above baseline, and (3) 25 percent below baseline.

Effect of Premiums on Health Insurance Participation

  • The estimated decrease in probability of take-up associated with a 10 percent increase in employee out-of-pocket premium is small (about 1 tenth of a percentage point) and statistically insignificant. The implied elasticity is -0.013.
  • Models that limit the sample to those who do not take up family coverage (as a proxy for spousal coverage data) or to low-wage employees ($34,000/year or less) produce similarly small and statistically insignificant estimates of premium effect on take-up.

Effect of Premiums on Participation in Other Fringe Benefits
In contrast to health insurance, several other benefits demonstrate large and statistically significant price effects. Across benefits examined, progressively larger effects were observed for the effect of employee cost on dental insurance, vision benefits, long-term care insurance, and a “wellness benefit” (a set of preventive and fitness benefits).

A 10 percent increase in respective premiums is associated with declines in the probability of take-up of:

  • -0.0145 percentage points for dental (SE 0.0025).
  • -0.0207 percentage points for vision (SE 0.0032).
  • -0.0220 percentage points for long term care (SE 0.0037).
  • -0.0314 percentage points for the wellness benefit (SE 0.0040).

The implied price elasticities for non-health benefits are at least a full order of magnitude greater than that for health benefits (where the result was statistically insignificant):
  • -0.167 for dental.
  • -0.276 for vision.
  • -0.468 for long term care.
  • -0.766 for the wellness benefit.

The price effect for non-health benefits does not appear to be linear; the negative effect of a price increase is larger in absolute value than the positive effect of a price decrease.

Using a new data source based on hypothetical worker responses to price changes, this study confirms findings from other research showing that large subsidies would be needed to increase take up rates of employer-sponsored insurance. It is unlikely that subsidies at levels currently being considered would reduce substantially the number of uninsured. Because of its novel approach, this study is not subject to the same biases evident in existing studies. The consistency of findings suggests that the price responsiveness is truly small.

Binary probit models with the dependent variable set to reflect whether the worker enrolls in any level of benefit at a given price. Standard errors are calculated to take into account three observations for each respondent (baseline co-premium, baseline plus 25 percent, and baseline minus 25 percent). Covariates include age, gender, race, income, years of tenure, and location.

The analysis is based on the employees of a single firm who have chosen an employer that already offers health benefits. We cannot be sure how well these findings would generalize to other workers, though they are consistent with existing literature based on other samples, suggesting the conclusions are likely robust to sample changes.

Because the data arise from a survey, rather than observed choices, there is uncertainty about what preferences are revealed. Employee survey responses may not reflect how employees would actually respond to premiums. There were no immediate consequences for how employees represented preferences, and employees were told the results would be used to set the firm’s benefits policy. This raises questions about the potential for strategic responses by employees.

Also, the survey data include employee age, race, gender, salary, and firm tenure, but do not capture marital status or family composition. Thus, spousal coverage options are not known with certainty and the response to price may be lower for employees with other coverage options. Sensitivity analysis, however, suggests that results are similar for individuals choosing single coverage, who are more likely not to have spousal coverage options.

Data are from a January-February, 2000 computer-administered survey of 423 employees of one large firm, with respondents chosen to be representative of the firm’s U.S. workforce. For health benefits, respondents could opt for self-only coverage, coverage for the employee plus one dependent, or coverage for the employee plus two or more dependents. In terms of plan types, options included a catastrophic plan, an HMO, or a PPO.

The Effect of Premiums on the Decision to Participate in Health Insurance and Other Fringe Benefits Offered by the Employer: Evidence from a Real-World Experiment
Anne Beeson Royalty, Indiana University-Purdue University Indianapolis and John Hagens, International Planning and Research

Conference paper presented at ERIU Research Conference, July 2003

The final version of the paper appeared as: Royalty, Anne Beeson and Hagens, John. “The Effect of Premiums on the Decision to Participate in Health Insurance and Other Fringe Benefits Offered by the Employer: Evidence from a Real-world Experiment.” Journal of Health Economics, 2005: 21(1):95-112.

ERIU Working Paper #23 (Adobe PDF)

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Funded by The Robert Wood Johnson Foundation, ERIU is a five-year program shedding new light on the causes and consequences of lack of coverage, and the crucial role that health insurance plays in shaping the U.S. labor market. The Foundation does not endorse the findings of this or other independent research projects.