Employer health insurance offerings and employee enrollment decisions

Health Services Research, Oct, 2005 by Daniel Polsky, Rebecca Stein, Sean Nicholson, M. Kate Bundorf

Although the vast majority of individuals under the age of 65 obtain health insurance through an employer, considerable variation exists across employers in the health benefits they offer to workers. While many, particularly small employers, choose not to offer health insurance at all, the health benefits among those providing coverage to workers vary by the number and types of plans offered, the quality of the plans, and the premium contribution required from workers. Because the rising number of uninsured (from 38.3 million in 1992 to 43.6 million in 2002 [U.S. Census Bureau]) has been driven largely by increases in the number of workers declining coverage from their employer (Cooper and Schone 1997; Farber and Levy 2000; Cutler 2002), the effect of an employer's benefit structure on enrollment rates is increasingly important. Relatively little evidence exists, however, on how the health benefit decisions made by employers affect enrollment decisions of workers and their families.

Much of the relevant literature has focused on the effects of the employee's contribution to health insurance premiums (i.e., net premiums) on take-up rates of employer-sponsored coverage, particularly in light of evidence that net premiums have risen rapidly in recent years as a result of higher plan premiums and a reduction in the employer's contribution (Gabel et al. 2002). Gabel et al. (2001) find that the proportion of workers enrolling in the coverage offered by an employer plan is negatively correlated with the minimum monthly net premium of single coverage. Chernew, Frick, and McLaughlin (1997), using a sample of single workers in small businesses in seven metropolitan areas, find that, while participation of low-income workers in employer sponsored plans is higher when net premiums are lower, even large subsidies will not induce all to participate. Blumberg, Nichols, and Banthin (2001), using the MEPS data set that contains a nationally representative sample of 6,500 workers offered insurance, find a small price elasticity of take-up for families, and a very small and insignificant elasticity for single persons. Gruber and Washington (2003), using personnel records for all federal employees from 1991 through 2002, find a small elasticity of employer insurance take-up with respect to its after tax price.

These studies, however, generally do not account for the availability of coverage from alternative sources. This is potentially an important omission. Abraham and Royalty (2005) find that having a second earner in a household dramatically improves both access to employer insurance and the generosity of the insurance obtained through the employer-based system. Many workers who decline coverage from their own employer are insured through an employer-based health plan from another source (Cooper and Schone 1997). In addition, evidence from the "crowd-out" literature suggests that many individuals who become eligible for public programs will drop their private health insurance (Cutler and Gruber 1996). Consequently, take-up of employer-based health insurance depends on offers from sources other than the worker's employer, such as a spouse's employer or a public program. To the extent that workers take-up coverage from another source when declining coverage from their own employer in response to the net premiums offered for such coverage, the elasticity of observed employer take-up may be higher than the elasticity of total coverage.

An aspect of employer decision making that has received relatively little attention is how the number and type of plans an employer offers affects employee take-up rates. Schone and Cooper (2001) find that workers who have a choice of different types of health plans are more likely to take-up insurance from their employer, are more likely to enroll in an HMO, and are more satisfied with the medical care they receive. Presumably different types of plans are more or less attractive to different workers, yet analysis of take-up of employer-sponsored coverage has not directly addressed this issue.

In this paper, we use a large, nationally representative household data set to analyze variation in coverage rates among those eligible for employer-sponsored health insurance. In particular, we measure the extent to which the characteristics of the health plans available to workers from their own employer affect the likelihood of enrollment in a plan offered by their employer, enrolling in an alternative source of coverage, or remaining uninsured. In the case of married workers, we also consider the effect of the characteristics of coverage available through employer of the spouse.

Our study makes two contributions to this literature. First, we do not assume that workers who decline their employer insurance offer are uninsured; they may take-up coverage from an alternative source. Second, for married workers, we consider the health plan characteristics of the offers from both the employee's firm and the spouse's firm. This allows us to directly examine the relationship between all employer offerings within a family and employee coverage decisions, rather than merely the take-up rates from a worker's employer. This leads to more realistic estimates of how employers affect enrollment decisions of workers and their families.