Erosion in health insureance coverage through employers

Since the late 1990s, there has been erosion in health insurance coverage through employers. This erosion, however, is not primarily the result of fewer firms offering coverage or declines in eligibility for coverage. Instead, the erosion results from workers who are eligible for health insurance coverage but who are declining it. Which reports the various employer-sponsored health insurance rates over the 1988 to 2005 period.

The "offer rate" is the proportion of employers offering health insurance to their workers. This rate has been relatively stable throughout the period. The "eligibility rate" is the proportion of workers eligible for health insurance coverage. [Some workers may not be eligible for coverage because they work part-time or are seasonal employees.] This rate declined in the early 1990s but increased until recently. The "take-up rate" measures the proportion of eligible workers who accept coverage through their employer. This value has declined consistently over the period.

Employees' decision regarding whether or not to accept coverage from their employer is very different from the decision regarding which of the employer's plan offerings to take. Employees may have fewer good health insurance substitutes beyond their own employer-sponsored coverage, and as a result, we should expect much less price sensitivity.

Chernew, Frick, and McLaughlin [1997] were among the first to examine the effects of premium contributions on take-up rates among workers. They examined data from nearly 2,000 small businesses in six cities collected in late 1992 and early 1993. They found that even large subsidies were insufficient to encourage total participation in health plans, even among those with no other source of employer-sponsored coverage. Subsidies as high as 75% were estimated to have increased participation only from 89.0 to 92.6% and implied an out-of-pocket premium elasticity of - 0.07. Blumberg, Nichols, and Banthin [2001] found results similar to that of the Chernew, Frick, and McLaughlin study, using a nationally representative sample. Their take-up elasticity estimate was - 0.04. These estimates are both much smaller [in absolute value] than the out-of-pocket elasticities we saw in the choice of plan research.

Using 1999 employer health insurance data, Cutler [2002] sought to explain the drop in take-up rates over the 1990s. He examined business specific take-up rates as a function of the out-of-pocket premium for the least costly plan offered, as well as wage rates, total health insurance premiums, and controls for industry and region. He found a take-up elasticity of - 0.12, somewhat larger than that found by Chernew, Frick, and McLaughlin [1997] and Blumberg, Nichols, and Banthin [2001]. According to Cutler, for each 10 % increase in employee premium contributions, the take-up rate declined by 1.2%. While this is a small price response, because premium contributions had increased so dramatically over the period, the effect was large enough to explain the entire decline in employer-sponsored coverage. That is, the small price responsiveness, together with large increases in out-of-pocket premiums, led to declines in take-up rates that were large enough to explain the entire drop in employer-sponsored coverage over the period. Cutler argued that a price responsiveness of - .06 was enough to explain the decline in take-up rates.

Gruber and Washington also investigated the extent of price sensitivity among those offered employer coverage. They argued that the earlier work may have resulted in biased estimates of price responsiveness. The direction of bias in the Chernew and Blumberg estimates depends on whether employers provide low employee premium contributions because workers have preferences for health insurance, or on whether they provide low premium contributions to encourage workers with low preferences for health insurance to take it nonetheless. Cutler's estimates may be biased because the size of the premium contribution is likely to depend on the tax rate that workers have to pay.

Gruber and Washington investigated a natural experiment that appeared when U.S. postal employees were allowed to pay the employee share of their health insurance premiums with pretax dollars after 1994. This change should be unrelated to worker preferences for health insurance and to tax rates of workers. Using 1991 through 2002 data from the U.S. Postal Service and the Federal Employees Health Benefit Plan, Gruber and Washington also found small take-up elasticities. In the family coverage regression, they found a take-up elasticity of - .022 and an overall take-up elasticity of - 0.007. These estimates of price responsiveness are even smaller than those found by earlier studies. If these elasticities are closer to the true value, then we must look elsewhere for an explanation for the drop in the take-up rate.