Health Insurance Demand And The Generosity

Forum for Health Economics & Policy
Volume 12, Issue 2 2009 Article 3

(H EALTH E CONOMICS )

Health Insurance Demand and the Generosity of Benefits: Fixed Effects Estimates of the Price Elasticity
Paul D. Jacobs∗

∗

Congressional Budget Office, pauldjacobs@gmail.com

Copyright c 2009 The Berkeley Electronic Press. All rights reserved.

Health Insurance Demand and the Generosity ofBenefits: Fixed Effects Estimates of the Price Elasticity∗
Paul D. Jacobs

Abstract
This paper explores a central question in health economics: How sensitive is worker demand for health insurance? After controlling for variables omitted in other analyses, such as the generosity of plan coverage and aspects of worker demand that are constant within firms over time, I estimate a price elasticity(between -0.014 and -0.017) which is smaller than previous estimates. The analysis also finds that employees are more likely to take-up policies with greater insurance protection from hospital expenses, but not for increased coverage for prescription drug or provider office visit expenses. Taken together, increases in worker-paid premiums explain about 60 percent of the fall in take-up of employerpolicies over time, whereas increases in insurance cost-sharing explain about 10 percent of that change. Changes in employer contributions for health insurance had a limited effect on take-up compared with the amounts employees paid out-of-pocket for premiums. An implication of these findings is that policies which attempt to subsidize employee-paid portions of the premium would be an expensive andpotentially ineffective strategy for achieving greater coverage, particularly if the quality of that coverage is not perceived as worthwhile. KEYWORDS: insurance demand, coverage, take-up, out-of-pocket premiums, cost-sharing, measurement error, fixed effects, actuarial value

∗

As my dissertation committee chair, Thomas Hertz generously provided support and econometric expertise throughout thedevelopment of this paper. Jonathan Gruber, also a member of my committee, contributed valuable insights for which I am very grateful. This paper was based on data from the Kaiser Family Foundation, which I thank for allowing access to several years of their Employer Health Benefits Survey. Gary Claxton and Bianca DiJulio in the Health Care Marketplace Project of the Foundation were helpful andencouraging colleagues who taught me a great deal about the survey. Finally, I owe an incredible debt to Martha Heberlein for reviewing numerous earlier drafts of this paper. The analysis and views expressed in this paper are those of the author alone and should not be interpreted as those of the Congressional Budget Office.

Jacobs: Health Insurance Demand and the Generosity of Benefits

1.Introduction

Employer-sponsored health insurance is the predominant source of health insurance coverage in the United States. In 2001, 81 percent of workers were covered by an employer or union plan, but by 2005 this figure had fallen to 77 percent. Increasingly restrictive employee eligibility requirements and a rollback in the number of employers who offered health insurance precipitated mostof this decline. However, a quarter of the fall – a decrease in coverage of about one percent of all employees in the United States – can be attributed to an increasing number of employees who refused employer offers of insurance (Clemans-Cope and Garrett, 2006). One explanation of this trend may be the increasing cost of employer health insurance: a recent study of Californians showed that 62percent of all uninsured workers who were offered insurance by their employers perceived the cost of their employers’ offers to be unaffordable (Brown et al., 2007). This paper measures the sensitivity of workers to changes in their out-ofpocket (OOP) and employer-paid premiums by calculating the effect of these changes on employee take-up of health insurance. One innovation of this paper is the...