Academic journal article Monthly Labor Review

Why Are Employer-Sponsored Health Insurance Premiums Higher in the Public Sector Than in the Private Sector?

Academic journal article Monthly Labor Review

Why Are Employer-Sponsored Health Insurance Premiums Higher in the Public Sector Than in the Private Sector?

Article excerpt

In this article, we examine the factors explaining differences in public and private sector health insurance premiums for enrollees with single coverage. We use data from the 2000 and 2014 Medical Expenditure Panel Survey-Insurance Component, along with decomposition methods, to explore the relative explanatory importance of plan features and benefit generosity, such as deductibles and other forms of cost sharing, basic employee characteristics (e.g., age, gender, and education), and unionization. While there was little difference in public and private sector premiums in 2000, by 2014, public premiums had exceeded private premiums by 14 to 19 percent. We find that differences in plan characteristics played a substantial role in explaining premium differences in 2014, but they were not the only, or even the most important, factor. Differences in worker age, gender, marital status, and educational attainment were also important factors, as was workforce unionization.

With many state and local governments facing difficult fiscal challenges in recent years, the compensation of public employees has come under increased scrutiny. Although the cost of health insurance benefits for active workers is not perceived as a "crisis" in the way underfunded pensions are, health benefits in 2014 were the costliest voluntary nonwage benefit for employers. (1) Over the past decade and a half, that cost has grown more rapidly in the public sector than in the private sector. According to data from the U.S. Bureau of Labor Statistics, between 2000 and 2014, health insurance costs as a share of total compensation rose by roughly 4 percentage points for nonfederal public sector employers, compared with roughly 2 percentage points for private sector employers. Data from the Medical Expenditure Panel Survey-Insurance Component (MEPS-IC), which we use in this study, show that, in 2000, average health insurance premiums for single coverage were 10 percent higher for local government enrollees than for private sector enrollees; however, by 2014, that difference had grown to 19 percent. Public sector enrollees also generally contribute a smaller proportion of total premium costs than do private sector enrollees (e.g., 13 percent for local enrollees versus 24 percent for private enrollees in 2014).

Economic theory predicts that, in competitive labor markets, rising health insurance costs will affect wages. If this is the case, the increase in public sector premiums need not imply an increase in the overall compensation of the sector's workers. However, recent research suggests that the wages of public sector workers do not adjust to fully offset higher health insurance costs, (2) although this result must be interpreted cautiously given limited evidence for a compensating wage differential for health benefits. (3)

To evaluate the policy and welfare implications of differences in health insurance premiums for public and private sector enrollees, we need to understand the determinants of these differences. One possible explanation for the increasing gap in premiums is that, in certain aspects, public sector health plans have become relatively more generous than private sector plans. This may have occurred if, for example, private employers have been more aggressive than public employers in increasing deductibles and other forms of cost sharing in response to rising healthcare costs. If this is the case, public sector benefits can be seen as increasing in value relative to private sector benefits. Without a corresponding decline in wages, this increase would imply an increase in compensation. However, public--private differences in premiums will also reflect differences in the demographic characteristics of employees in the two sectors, as public sector employees are more likely to be older and female than private sector workers.

In this article, we examine the factors explaining differences in health insurance premiums for actively employed public and private sector enrollees with single coverage. …

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