Academic journal article Journal of Risk and Insurance

The Effects of Offering Health Plan Choice within Employment-Based Purchasing Groups

Academic journal article Journal of Risk and Insurance

The Effects of Offering Health Plan Choice within Employment-Based Purchasing Groups

Article excerpt

ABSTRACT

Employers may offer employees a choice of health plans either to promote competition among plans or to better cater to employee preferences for different types of products. This article examines whether the relationship between the availability of choice and insurance costs and coverage are consistent with these models of employer behavior. The results indicate that employers who offer choice have lower average premiums, primarily because employees are enrolled in less generous plans, and cover a greater proportion of workers than those who do not. The results are consistent with employers offering choice to accommodate diverse worker preferences.

INTRODUCTION

Employers are the primary source of health insurance for the vast majority of the nonelderly insured population in the United States (DeNavas-Walt, Proctor, and Lee, 2004). Over the last two decades, employers have increasingly offered workers a choice of health plans. Between 1977 and 1998, the percentage of employees offered more than one plan by their employer grew from 18 percent to 66 percent (Gabel, 1999).

The economic literature provides two explanations as to why employers might offer workers a choice among health plans. First, employers may offer choice to promote greater competition among plans. This rationale underlies the well-known "managed competition" approach to benefit design (Enthoven and Kronick, 1989). An alternative explanation is that employers are responding to heterogeneity in employees' preferences for health insurance (Goldstein and Pauly, 1976). In theory, employers minimize total compensation costs by offering workers their optimal combination of cash wages and fringe benefits (Summers, 1989). Thus, when employees vary in their preferences for coverage, employers have an incentive to offer multiple plans to cater to the diverse preferences of their workers.

In this article, I identify the implications of these two explanations for employer behavior for the relationship between the availability of choice and health insurance premiums and rates of coverage within a firm. I then examine whether observed outcomes are consistent with these models of employer behavior.

THE DETERMINANTS AND EFFECTS OF HEALTH PLAN CHOICE

Employers serve as the intermediary between consumers and insurers in the purchase of the vast majority of private health insurance in the United States. This prominent role for employers is due to the favorable tax treatment of employer-sponsored health insurance, which creates a subsidy of approximately 30 percent for health insurance purchased through an employer (Gruber and Poterba, 1996); to economies of scale in insurance selection and administration, which make coverage cheaper when purchased as part of a group than when purchased as an individual; and to the potential for employment-based group purchasing to minimize problems of adverse selection in health insurance markets (Gruber, 2000).

Historically, employers typically offered a single plan and often did not require employees to contribute out of pocket to the premium (Pauly, 1986). During the last two decades, however, employers have increasingly offered workers a choice of health plans and have required employees to make out-of-pocket contributions when they enroll. From 1977 to 1998, the percentage of employees offered more than one plan, among those offered coverage from their employer, increased from 18 percent to 66 percent, and the average monthly employee contribution, measured in 1998 dollars, increased from $26 to $91 (Gabel, 1999).

The economic literature offers two explanations for why employers offer a choice of plans. First, employers may offer choice to stimulate health plan competition. Under a "managed competition" approach to benefit design, employers offer multiple plans with standardized benefits, require workers to pay an incremental premium for more expensive plans, and provide workers with information on plan quality (Enthoven and Kronick, 1989). …

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