Employers as Agents Chapter 15

2 Overview Employee satisfaction with employer-sponsored health benefits Employee satisfaction with employer-sponsored health benefits Labor market sorting—preferences Labor market sorting—preferences Dual-earner households—choices Dual-earner households—choices Providing information on health plan quality Providing information on health plan quality

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4 Preference for Employment-Based Insurance Under Various Proposals, 1999 Source: data from EBRI Issue Brief 211 (July 1999)

5 Labor Market Sorting Suppose there were perfectly interchangeable workers who had different preferences for health insurance. Suppose there were perfectly interchangeable workers who had different preferences for health insurance. In a frictionless labor market each firm would offer a single insurance plan and workers would sort themselves into the wage-insurance trade- off they preferred. In a frictionless labor market each firm would offer a single insurance plan and workers would sort themselves into the wage-insurance trade- off they preferred.

6 Labor Market Sorting (2) Those who do not value insurance work for the firms that do not offer coverage Those who do not value insurance work for the firms that do not offer coverage Those firms that do not offer coverage are likely to be those that find it more expensive to do so Those firms that do not offer coverage are likely to be those that find it more expensive to do so But workers have different skills, and firms often need workers with various talents But workers have different skills, and firms often need workers with various talents Suggests that diversity of preferences among workers will lead firms to offer multiple health plans Suggests that diversity of preferences among workers will lead firms to offer multiple health plans

7 Monheit and Vistnes (1999) on Worker Sorting Analysis of 1987 NMCES data on employment and whether individuals have health insurance coverage Analysis of 1987 NMCES data on employment and whether individuals have health insurance coverage Preference measures: Preference measures: 1. “I’m healthy enough that I really don’t need health insurance.” 2. “Health insurance is not worth the money it costs.” 3. “I’m more likely to take risks than the average person.” NMCES= National Medical Care Expenditure Survey

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9 Sorting Analysis Job with insurance offered is a function of: Job with insurance offered is a function of: Difference in wages in job with and without offer Difference in wages in job with and without offer Expected out-of-pocket medical expenses Expected out-of-pocket medical expenses Costs of search Costs of search Preference for health insurance measures: Preference for health insurance measures: Strong preferences (agreed with 1 and 2) Strong preferences (agreed with 1 and 2) Weak preferences (disagreed with 1 and 2) Weak preferences (disagreed with 1 and 2)

10 Sorting Results Those with strong preferences for coverage Those with strong preferences for coverage 14 percentage points more likely to have a job offering coverage than those with weak preferences 14 percentage points more likely to have a job offering coverage than those with weak preferences Usual employment and demographic characteristics explain 17 percentage points Usual employment and demographic characteristics explain 17 percentage points Preferences as important as demographics in determining coverage Preferences as important as demographics in determining coverage

11 Dual-Earner Households Dual-earner insurance opportunities Dual-earner insurance opportunities Both single coverage Both single coverage Both family coverage Both family coverage One single and one family One single and one family One family and one with no coverage One family and one with no coverage One single and one with no coverage One single and one with no coverage Both with no coverage Both with no coverage Compensating differential issues Compensating differential issues

12 Abraham and Royalty (2005) Analysis Use 1997 Medical Expenditure Panel Survey (MEPS) data on employment and insurance coverage Use 1997 Medical Expenditure Panel Survey (MEPS) data on employment and insurance coverage Other things equal, two earners: Other things equal, two earners: Increased the probability that a worker would have coverage and that the entire family would have coverage by 10 to 20 percentage points Increased the probability that a worker would have coverage and that the entire family would have coverage by 10 to 20 percentage points Had, on average, 1.3 more plans to choose from and had a 22 percentage point increase in the probability of having a plan with freedom of provider choice Had, on average, 1.3 more plans to choose from and had a 22 percentage point increase in the probability of having a plan with freedom of provider choice

13 Table 15-2 One- and Two-Earner Household Effects on the Probability of Vulnerable Workers Having Employer-Sponsored Health Insurance Coverage Without Controlling for Income Controlling for Income Marginal Effect Percent Offset Marginal Effect Percent Offset Part-time – One Earner-.466*-.392* Part-time – Two Earner+.361*77%+.310*79% Self-employed – One Earner-.460*-.520* Self-employed – Two Earner+.168*36%+.188*36% Small establishment – One Earner -.286*-.254* Small establishment – Two Earner +.165*58%+.124*49% * Coefficient is statistically significant at the 99 percent confidence level. Source: adapted from Abraham and Royalty (2005)

14 Abraham & Royalty Conclusion “Overall, we find that the average effect of having two earners leads to a dramatic improvement both with respect to access and choice set generosity....[H]ouseholds with vulnerable workers, including part-time, self-employed, and workers in small firms, tend to fare worse on all dimensions, but that having a second earner serves to mitigate a significant proportion of the negative effects.” Abraham and Royalty (2005, 182)

15 Employer Premium Contributions How does an employer deal with differing preferences for coverage? How does an employer deal with differing preferences for coverage? Individualized compensating wage differentials Individualized compensating wage differentials Group compensating differentials Group compensating differentials Offer one plan with an employee premium contribution Offer one plan with an employee premium contribution Offer multiple plans with employee premium contributions Offer multiple plans with employee premium contributions The premium contribution as a means of accommodating employee preferences The premium contribution as a means of accommodating employee preferences

16 “Employer Choices of Family Premium Sharing” Explore the effects of worker heterogeneity and labor force composition on the nature the marginal employee premium contribution (EPC) for family coverage Explore the effects of worker heterogeneity and labor force composition on the nature the marginal employee premium contribution (EPC) for family coverage Marginal EPC = (Family EPC – Single EPC) Source: Vistnes, Morrisey, and Jensen (2006)

17 Trends in Inflation Adjusted Employee Premium Contributions (EPC) Family EPC Single EPC Constant Dollars Percent of Total Premium Constant Dollars Percent of Total Premium 1997$1,70931%$41919% 19981, , , , Source: data from Vistnes, Morrisey & Jensen (2006)

18 Heterogeneous Workforce As an establishment’s workforce becomes more heterogeneous, the marginal EPC will increase. As an establishment’s workforce becomes more heterogeneous, the marginal EPC will increase. Women in the labor force Women in the labor force Older workers in the labor force Older workers in the labor force Complicated by the prevalence of two-earner households in the local market Complicated by the prevalence of two-earner households in the local market Source: Vistnes, Morrisey, and Jensen (2006)

19 U.S. Labor Force Has Changed Labor force participation rate among married women has increased from 20 percent in 1950 to 61 percent in Labor force participation rate among married women has increased from 20 percent in 1950 to 61 percent in By 1997, 65 percent of married couples with children under age 18 were dual-earner couples. By 1997, 65 percent of married couples with children under age 18 were dual-earner couples. Source: Vistnes, Morrisey, and Jensen (2006)

20 Data 1997–2001 Medical Expenditure Panel Survey—Insurance Component (MEPS-IC) 1997–2001 Medical Expenditure Panel Survey—Insurance Component (MEPS-IC) 84,500 private-sector establishments 84,500 private-sector establishments 131,000 plans 131,000 plans 41,300 HMOs 41,300 HMOs 48,000 PPOs 48,000 PPOs 23,600 point-of-service plans and 23,600 point-of-service plans and 18,200 fee-for-service plans 18,200 fee-for-service plans Census Bureau’s Public Use Microdata Sample for 2000 (PUMS) Census Bureau’s Public Use Microdata Sample for 2000 (PUMS) sample of 14 million workers sample of 14 million workers Area Resource File Area Resource File County Business Pattern Data County Business Pattern Data Vistnes et al. (2006)

21 Women and Two-Earner Households Two-earner households potentially have more employer-based insurance options. Two-earner households potentially have more employer-based insurance options. In such a household, the family may prefer to obtain health insurance through one spouse and allow the other to take more compensation as money income. In such a household, the family may prefer to obtain health insurance through one spouse and allow the other to take more compensation as money income. If women (or younger workers) are disproportionately second earners in the family, they would presumably prefer wages to insurance. Thus, EPC should be higher in firms with more women, in markets with more two-earner households. If women (or younger workers) are disproportionately second earners in the family, they would presumably prefer wages to insurance. Thus, EPC should be higher in firms with more women, in markets with more two-earner households. Source: Vistnes, Morrisey, and Jensen (2006)

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23 Conclusion Employers are responsive to the range of insurance options that modern families have available Employers are responsive to the range of insurance options that modern families have available Larger shares of women or younger workers matter, but only in the context of the local labor market Larger shares of women or younger workers matter, but only in the context of the local labor market The open policy question is whether firms are responding to employee demand for more flexible arrangements or driving workers to coverage available through a spouse. The open policy question is whether firms are responding to employee demand for more flexible arrangements or driving workers to coverage available through a spouse. Source: Vistnes, Morrisey, and Jensen (2006)

24 Premium Contributions and Government Programs Used 1997–2001 MEPS data to examine the effects of the SCHIP expansion on employee premium contributions Used 1997–2001 MEPS data to examine the effects of the SCHIP expansion on employee premium contributions SCHIP expands eligibility for public health insurance for children of the working poor SCHIP expands eligibility for public health insurance for children of the working poor Pre-1997 family income: a 15-year-old eligible for public insurance ranged from 10 to 225 percent of federal poverty line Pre-1997 family income: a 15-year-old eligible for public insurance ranged from 10 to 225 percent of federal poverty line By 2000 the range was 100 to 400 percent By 2000 the range was 100 to 400 percent Expect employers to raise employee premium contributions to allow/encourage employees to respond Expect employers to raise employee premium contributions to allow/encourage employees to respond Source: Buchmueller et al. (2005)

25 SCHIP findings An employer with 20 percent of the potential workforce eligible for SCHIP benefits would raise marginal cost of family coverage by $119 per year. An employer with 20 percent of the potential workforce eligible for SCHIP benefits would raise marginal cost of family coverage by $119 per year. With 50 percent eligible, the associated increase in marginal cost of family coverage increased by $351 per year. With 50 percent eligible, the associated increase in marginal cost of family coverage increased by $351 per year.

26 Health Plan Quality Few studies, but of those, most find that information on plan quality had little impact on the choice of plan Few studies, but of those, most find that information on plan quality had little impact on the choice of plan Chernew and Scanlon (1998) Chernew and Scanlon (1998) HEDIS appears to have little impact on plan choice HEDIS appears to have little impact on plan choice Attribute dimensions are not well correlated Attribute dimensions are not well correlated Superior “preventive services” associated with higher enrollment share, but Superior “preventive services” associated with higher enrollment share, but Superior “satisfaction” associated with lower enrollment share (!) Superior “satisfaction” associated with lower enrollment share (!) Price and physicians per member associated with higher enrollment share Price and physicians per member associated with higher enrollment share Note: HEDIS = Health Plan Employer Data & Information Set; recently renamed the Healthcare Effectiveness Data & Information Set

27 “The Effect of Report Cards on Consumer Choice in the Health Insurance Market” Federal Employees Health Benefits Plan Experiment Office of Personnel Management surveyed federal employees in 1994 and 1995 concerning satisfaction and related issues with the Federal Employees Health Benefits Plan (FEHBP). Office of Personnel Management surveyed federal employees in 1994 and 1995 concerning satisfaction and related issues with the Federal Employees Health Benefits Plan (FEHBP). Summary information distributed to employees for 1995 and 1996 open-enrollment period Summary information distributed to employees for 1995 and 1996 open-enrollment period 25 percent got satisfaction summaries in percent got satisfaction summaries in percent got the summaries in percent got the summaries in 1996 Source: Wedig and Tai-Seale (2002)

28 Wedig and Tai-Seale (2002) Findings FEHBP measures of quality were highly correlated FEHBP measures of quality were highly correlated Dissemination of plan information did influence choice Dissemination of plan information did influence choice One standard deviation increase in report card measure of overall quality increased likelihood of plan selection by more than 50 percent—a large effect One standard deviation increase in report card measure of overall quality increased likelihood of plan selection by more than 50 percent—a large effect Increase in report card measure of plan coverage influenced choice, but only among new hires Increase in report card measure of plan coverage influenced choice, but only among new hires Dissemination of quality information increased the prices sensitivity of plan choice Dissemination of quality information increased the prices sensitivity of plan choice

29 Discussion Questions What would be the consequences of a firm offering a health insurance plan that its employees did not desire? What would be the consequences of a firm offering a health insurance plan that its employees did not desire?

30 Discussion Questions Suppose the Congress expanded veterans’ benefits to provide medical care for all people who had served in the military to the level currently provided to those with service- connected disabilities. What effect would this have on the size of the employee premium contributions set by employers? Suppose the Congress expanded veterans’ benefits to provide medical care for all people who had served in the military to the level currently provided to those with service- connected disabilities. What effect would this have on the size of the employee premium contributions set by employers?

31 Discussion Questions In Chapter 14 (and also in Chapter 16), we discuss flexible spending accounts (FSAs), which allow employee premium contributions to be paid with pretax dollars. What effect would a newly introduced flexible spending account have on the size of employee premium contributions in a firm? In Chapter 14 (and also in Chapter 16), we discuss flexible spending accounts (FSAs), which allow employee premium contributions to be paid with pretax dollars. What effect would a newly introduced flexible spending account have on the size of employee premium contributions in a firm?

32 Discussion Questions Why would access to easily understood and credible information on the quality of health plans increase the price sensitivity of health insurance for employees? Why would access to easily understood and credible information on the quality of health plans increase the price sensitivity of health insurance for employees?