HEALTH INSURANCE COVERAGE
The 1980s and 1990s were marked by two concurrent trends in employer-provided health insurance: a significant decrease in the fraction of workers receiving insurance through their employers and a sharp increase in the insurance premiums paid by workers. These trends and the possible link between them are explored in two new NBER studies. In Employee Costs and the Decline in Health Insurance Coverage (NBER Working Paper 9036), David Cutler finds that the fraction of non-elderly Americans receiving health insurance through employers fell from 71% in 1987 to 68% in 2000, despite a lengthy economic boom in the 1990s. Over this same time period, the fraction of the population that was uninsured rose by 3 percentage points, an increase of 7.2 million people.
A key question is why workers decline to take up benefits. Some workers may do so because they have access to insurance through a spouse. However, declining coverage is also common among those without access to other insurance - 20% of uninsured workers who are offered coverage decline it. When asked, over 60% of these workers list cost as the reason for declining coverage. In fact, employee premiums rose rapidly during this period. Between 1988 and 1993, the average annual employee premium for a family plan doubled from $814 to $1,656; this increase represents close to half of the total increase in the premium. Using data from several surveys of employers, Cutler estimates that each $10 increase in monthly employee premiums lowers the take-up rate by 0.4 percentage points. These results suggest that the increase in premiums from 1988 to 2000 can explain nearly all of the decrease in take-up of insurance coverage.
The authors identify six reasons why employers might have shifted premium costs to employees and estimate the importance of each between 1982 and 1996 using the nationally-representative Current Population Survey. The first factor is increased managed care penetration. As managed care spread, firms began to offer multiple insurance plans; because the cost of the plans can vary significantly, firms may have increased the employee's share of premiums to encourage employees to choose the low-cost option. The authors find that increased managed care penetration is associated with a lower probability that a firm pays all premiums, but the effect is not statistically significant.
Next, the authors explore whether employees' increased access to other insurance through a spouse's employer or through Medicaid led firms to raise employee premiums to encourage them to switch. They find that a 10 percentage point increase in the share of the employee's health spending that is Medicaid-eligible is associated with a 1.7 percentage point decrease in the probability the firm pays all premiums. Similarly, a 10 percentage point increase in the probability that the employee's spouse works is associated with a 1 percentage point decrease in the probability the firm pays all premiums.
The authors also look at the effect of rising insurance premiums and cyclical downturns in the economy. If firms are unable to respond to these factors by decreasing wages (for example, because of contracts or workers' reluctance to accept pay cuts), firms may decrease their share of insurance premiums instead. A 10 percentage point increase in the unemployment rate is associated with a roughly 1.5 percentage point decrease in probability the firm pays all premiums, while rising insurance costs are not found to be a significant factor. Finally, the authors investigate the effect of declining income tax rates, which reduce the subsidy to employer-provided insurance, and find that this is also associated with a decreased probability of the firm paying all premiums. Overall, the factors examined by the authors can explain about one-quarter of the rise in employee premiums over the 1982-1996 period.
David Cutler acknowledges research support from the National Institute on Aging and the Robert Wood Johnson foundation. Jonathan Gruber acknowledges support from the National Institute on Aging and the National Science Foundation. This research was summarized by Courtney Coile.