Number 4, January 2004



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Q&A with Johnathan Gruber, Ph.D.

Jonathan Gruber, Professor of Economics at the Massachusetts Institute of Technology, has spent more than a decade examining health insurance issues. Gruber, former Deputy Assistant Secretary for Economic Policy at the U.S. Treasury Department, recently co-authored the paper, “Subsidies to Employee Health Insurance Premiums and the Health Insurance Market.” Gruber recently talked with ERIU about the feasibility of targeting subsidies to induce uninsured workers to take-up employer-sponsored health insurance.

Q-Do uninsured workers take up offers of employer-offer health insurance when the cost is lowered for them through subsidies?

A-Previous literature has found that generally people don’t change their minds. Previous research has compared firms with different levels of employee contributions and found that take-up rates of those employer offers are really very similar across firms with different levels of contributions.

Ebonya Washington and I focused on a particular segment of the population—those who are offered health insurance—and the question is ‘Will those who are offered health insurance but turn it down, will they change their mind if the price changes?’

We examined the effect of the federal government’s introduction of tax subsidies for employer-provided health insurance to its employees, first for postal employees in 1994 and then for all other federal employees in the year 2000. We looked at what happened to take-up rates among uninsured federal workers and found, very much in line with the previous literature, a close to zero effect on employees’ decisions to take up health care coverage when there’s a change in the subsidization of health care premiums.

Q-What was the effect of the subsidy – moving from a post-tax to pre-tax treatment of premiums – for federal workers?

A-For a non-postal worker, the change took $500 to $1,000 off their health insurance costs.

Q-Your paper concludes that the subsidy increases government’s costs by about $700 million per year. And that led only 11,000 to 22,000 uninsured workers to take up coverage?

A-Right. About 7 percent to 8 percent of all federal employees are uninsured, and this change essentially made no dent in that number. To spend $38,000 per newly insured on such an incredibly small number is really the worst performance I’ve ever seen.

Q-What is the typical amount that policymakers figure or that researchers model it will cost for each newly insured individual?

A-It very much depends on the policy. For policies that cover small numbers of people, like 1 million or 2 million people, it typically costs around $3,000 for each newly insured. Policies such as the Democratic presidential candidates have proposed, which cover 25 or 30 million new people, typically cost about $10,000 per newly insured. The more people you can cover the more it costs. Again, to spend $38,000 per newly insured on such an incredibly small number is really the worst performance I’ve ever seen.

Q-Put this in perspective, what does the Federal Employees’ Health Benefits Plan spend on the typical federal worker?

A-The government today typically spends around $5,000 to $6,000 for a family.

Q-What were those extra costs attributed to?

A-Essentially 99 percent of the effect of this policy was basically a tax break for federal workers who were already insured.

Q-Do workers choose more or less expensive plans when offered a larger subsidy?

A-What we found—and this is keeping up with the previous literature—is that when you essentially lower the cost differential between more expensive and less expensive plans, which is what this subsidy does, people choose the more expensive plans. When the tax subsidy was in place you saw a shift to taking up more expensive health insurance plans.

Q-Why is the use of subsidies so attractive to healthcare policymakers?

A-It’s tempting when looking at it superficially. A large number of the uninsured, about one-quarter of the uninsured, are offered health insurance. One might think it’s an easy-to-get group. They are already in a context where health insurance is available, so subsidizing them might lead some of them to take it up.

What that argument misses is the fact that while that is a large share of the uninsured, it’s an incredibly small share of those who are offered insurance. Only about 7 percent of those offered insurance are uninsured. If you offer a subsidy to everyone who is offered health insurance, for every 7 cents that goes to someone who is uninsured, 93 cents goes to someone who is insured. So people are just thinking about it the wrong way.

Another motivation for subsidies here is more legitimate—it’s one of equity. These people say if we’re going to subsidize individuals to have health insurance, we need to help those who are doing the right things and buying health insurance through their employer—we’re going to offer a subsidy to them too. I think a lot of the experts who promote this understand it’s not a very efficient way to increase health insurance coverage but they promote it more from an equity standpoint.

Q-Are there any cases where premium subsidies seem to be effective, like in SCHIP?

A-In terms of subsidies to those already offered health insurance I see no context for their effective policy. But there are other types of subsidies that do work, such as offering subsidized buy-in rates to public insurance for low-income populations. I don’t want to tar all subsidies with one brush based on this research.

Q-How difficult is it to target employee premium subsidies? Why?

A-It’s incredibly difficult because the vast majority of those offered health insurance take it up. Even if you look at those below the poverty line, about 75 percent of people who are offered health insurance have health insurance. And if you go to 100 to 200 percent of the poverty level, about 85 percent of those offered health insurance have health insurance. The bottom line seems to be if people are offered health insurance they, by and large, take it. Either they take it or they take it through a spouse who is offered. What policymakers need to aim toward, if they want to promote private health insurance, is getting employers to offer insurance, not getting employees to take up once they are offered.

Q-What is the message for policymakers?

A-They should look at this in the context of the literature that exists. The bottom line is now you’ve got basically two different approaches to try to answer this question: one is to look casually at firms with different contribution rates; the other is to look more precisely at this particular change for a specific population. Both ways you end up with a similar answer: this is not a price responsive group. This is the final nail in the coffin of the argument that we should be subsidizing this population.

Q-What do you personally think are strategies policymakers should consider to get the biggest bang for the buck in reducing the number of uninsured?

A-That depends where you are on the budget constraint. If the goal is to cover a modest number of people, like 5 million people, then I think it’s unambiguous that the best thing to do is expand public health insurance. That’s highly targeted and it really gets the groups where the most uninsured reside. And in particular, I think the most efficient thing you could do is expand public health insurance not to more children, who are largely already eligible, but to uninsured adults who aren’t.

If you want to cover a bigger number, 20-plus million, then I think expanding public health insurance alone won’t do it. You need some combination of expanding public health insurance to low-income groups and allowing people to buy into some kind of pooling mechanism for higher income groups. Either buy into public insurance or buy into some state pool. That’s what you need in order to get to the bigger numbers. This is the final nail in the coffin of the argument that subsidizing premiums is an easy way to increase coverage

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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.