Insurance Employee Perceptions of Employer Plans

An agent is someone who acts on behalf of another. In health economics, we typically think of physicians as agents for their patients. As agents, physicians use their knowledge and expertise to diagnose, select, and apply treatment in a fashion that reflects the preferences and willingness to pay of their patients. Perfect agents do this without regard to their own preferences or financial incentives. As a matter of economics, however, as in real life, we expect agents to be imperfect. Many employees buy health insurance through their employers. To what extent do employers serve as agents for their employees? That is, to what extent do employers use their knowledge and expertise to obtain health insurance coverage that reflects their employees' preferences? In this article, we explore this issue.

The article begins with some descriptive evidence on the extent to which employees approve of the quality of the plans their employers offer and employees' preferences for different mixes of wages and benefits. We then introduce what is known as a labor market "sorting model," which suggests that the reason why employers offer very different health health insurance plans is that workers have preferences for different forms and extents of coverage. We also look at the empirical evidence concerning the labor market's success in matching workers' preferences with employers' offerings. The labor market today includes a majority of married couples in which both partners are employed outside the home.

These two-earner households are likely to have many more wage-health insurance tradeoffs available to them. A new line of empirical research has examined the effects of two-earner households on health insurance coverage obtained through an employer. The results suggest that, when making health insurance decisions, employees do consider the range of options available to them. This presents a challenge to employer-agents. They must provide health insurance coverage that meets a wide range of preferences, taking into consideration the incentives implicit in the tax laws, and still provide a compensation bundle that does not overpay or underpay employees.

Employee premium contributions for health insurance play an important role in sorting employees into benefit plans that reflect their own preferences for coverage and the availability of substitute sources of coverage through spouses, parents, and government programs. Indeed, one explanation for the growth of employee premium contributions is that it is an accommodation to the prevalence of two-earner households and the wider range of health insurance options available to them.

Finally, employees expect employer-agents to take health plan quality into consideration and to make information about health plan quality available when employees are choosing among offered plans. We explore the limited empirical evidence on the effects of health plan quality information on plan choice by employers and employees.

Employee Perceptions of Employer Plans

A necessary condition for employers to offer health insurance is that the workers value the coverage. This suggests that worker preferences should be an important factor in whether or not an employer offers coverage and in the nature of that coverage. Health benefits consultants often report results of employee surveys that show health insurance to be the most valued fringe benefit.

Such surveys, however, seldom directly address the issue of whether the health plans offered are the ones that the workers themselves would have chosen.

Two relatively recent surveys, however, offer some insight into the nature of health insurance coverage based on questions of plan quality and tradeoffs workers themselves would make. A survey commissioned by the Commonwealth Fund [2001] found that nearly three-quarters of employees with employer-sponsored health health insurance thought their employers did a "good job" of selecting quality health plans, while 10% said employers did a "mixed job," and 13% said employers did a "bad job."

The Employee Benefits Research Institute [Fronstin 1999] conducted a national survey of 1,004 employees with employer-sponsored coverage and asked them how satisfied they were with the wage-health benefits tradeoff their employers offered. Slightly more than two-thirds of employees were satisfied with their existing tradeoff. However, one in five would have preferred more health insurance and lower wages, while 8% would have preferred lower benefits and higher wages. The labor market appears to do a remarkably good job of matching preferences, but the outcome is far from perfect.