1. Premium Sensitivity Among Workers Chapter 12

2. 2 What Is the Relevant Premium? The “risk premium”? The “risk premium”? The “loading fee”? The “loading fee”? The total premium? The total premium? The employee premium contribution? The employee premium contribution?

3. 3 “Demand for Employment Based Health Insurance Plans” How responsive are workers to out-of-pocket premiums? How responsive are workers to out-of-pocket premiums? Independence of irrelevant alternatives Independence of irrelevant alternatives 17 Minneapolis–St. Paul firms from 1984 17 Minneapolis–St. Paul firms from 1984 16 offer a single FFS plan, most offer three HMOs 16 offer a single FFS plan, most offer three HMOs 900 single coverage observations 900 single coverage observations 2,100 family coverage observations 2,100 family coverage observations Source: Feldman et al. (1989)

4. 4 Model Plan choice is a function of: Plan choice is a function of: Out-of-pocket premium Out-of-pocket premium Employee characteristics Employee characteristics Age, sex, chronic health conditions Age, sex, chronic health conditions Coverage characteristics Coverage characteristics Preventive care coverage, inpatient and ambulatory: deductible, coinsurance, and stoploss Preventive care coverage, inpatient and ambulatory: deductible, coinsurance, and stoploss Non-financial characteristics of plan Non-financial characteristics of plan Days to routine appointment, wait for illness appointment, wait in doctor’s office Days to routine appointment, wait for illness appointment, wait in doctor’s office Plan type Plan type Years the plan has been offered Years the plan has been offered Source: Feldman et al. (1989)

5. 5 Findings Workers are less likely to choose health plans with higher out-of- pocket premiums Workers are less likely to choose health plans with higher out-of- pocket premiums Workers prefer plans with coverage for preventive services Workers prefer plans with coverage for preventive services Stronger preference among women Stronger preference among women FFS preferred over IPA or HMO FFS preferred over IPA or HMO But preference declines with years offered But preference declines with years offered (FFS + IPA) versus HMO is a more predictive model that FFS versus (IPA + HMO) (FFS + IPA) versus HMO is a more predictive model that FFS versus (IPA + HMO) Source: Feldman et al. (1989)

6. 6 Table 12-1: Percentage of Single Coverage Plan Enrollment Lost as a Result of a $5 per Month Premium Increase 102030405060708090100 10100 20100100 3010010098 4096908884 508682787470 60797368646056 7067635955504642 805753494540363228 90484439353127221514 10038343025211713840 This HMO’s initial share of single coverage workers* This HMO’s share of all HMO coverage Source: Morrisey (2005), Table 5.1 - computed from Feldman et al. (1989)

7. 7 Summary Substantial premium elasticity Substantial premium elasticity HMO with 50 percent of HMO enrollment would see an 8.6 percent loss of market share in response to a 1 percent increase in total premium HMO with 50 percent of HMO enrollment would see an 8.6 percent loss of market share in response to a 1 percent increase in total premium HMO with 90 percent of HMO enrollment would see a 1.7 percent loss in market share in response to a 1 percent increase in total premium HMO with 90 percent of HMO enrollment would see a 1.7 percent loss in market share in response to a 1 percent increase in total premium Source: Feldman et al. (1989)

8. 8 “Premium Elasticities of Health Plan Choice” Plan market share is a function of: Plan market share is a function of: Relative out-of-pocket premium Relative out-of-pocket premium Type of coverage Type of coverage Single, single + one, family Single, single + one, family Firm dummies Firm dummies Plan dummies Plan dummies Year dummies Year dummies Five Minneapolis–St. Paul firms Five Minneapolis–St. Paul firms Seven plans (three network HMOs, two FFS, one POS, one IPA) Seven plans (three network HMOs, two FFS, one POS, one IPA) Six years (1988–1993) Six years (1988–1993) Source: Dowd and Feldman (1994/95)

9. 9 Out-of-Pocket Premium Elasticities An increase of $5.00 ($9.70 in 2006) in the relative out-of-pocket premium for single coverage reduced a plan’s share of workers covered by.112 percentage points An increase of $5.00 ($9.70 in 2006) in the relative out-of-pocket premium for single coverage reduced a plan’s share of workers covered by.112 percentage points An elasticity of -7.9 from the insurer’s perspective An elasticity of -7.9 from the insurer’s perspective A similar increase in out-of-pocket premium for family coverage reduced a plan’s share of workers by.037 percentage points A similar increase in out-of-pocket premium for family coverage reduced a plan’s share of workers by.037 percentage points Source: Dowd and Feldman (1994/95)

10. 10 “Consumer Sensitivity to Health Plan Premiums” In 1994 University of California system moved to a level-dollar contribution pegged to the lowest cost plan In 1994 University of California system moved to a level-dollar contribution pegged to the lowest cost plan Previously tied to the cost of the four largest plans, including one high option indemnity plan Previously tied to the cost of the four largest plans, including one high option indemnity plan Approximately 100,000 employees Approximately 100,000 employees Source: Buchmueller and Feldstein (1996)

11. 11 Changes in Contribution Rates PlanType 1993 Enrollment Average ∆ in Employee Contribution Percentage of Enrollees Switching, 1994 FFS Prudential PrudentialIndemnity7,765 $ 70 42.3 UC Care UC Care Free PPO 7,32605.8 Los Alamos Los AlamosIndemnity2,39516275.1 HMO Health Net Health Net Free HMO 21,28305.3 Kaiser N Cal Kaiser N Cal Free HMO 11,95003.0 Kaiser S Cal Kaiser S Cal Free HMO 8,21105.7 Qual-Med Qual-Med Pay HMO 6,4901521.7 Foundation Health Foundation Health Pay HMO 3,6821922.3 TakeCare TakeCare Pay HMO 2,3891966.7 Source: data from Buchmueller and Feldstein (1996)

12. 12 Figure 12-2: Effect of Price on Health Plan Switching: Simulation Results Percent Switching Plans Increase in Monthly Employee Contributions Source: Buchmueller and Feldstein (1996), Exhibit 3

13. 13 Plan Switching Stanford faculty and staff Stanford faculty and staff 1994–1995 1994–1995 Consistent benefit packages across plans Consistent benefit packages across plans Level-dollar employer premium contribution Level-dollar employer premium contribution Survey of employees for household information Survey of employees for household information Four plan offerings Four plan offerings Closed panel HMO Closed panel HMO Two network HMOs Two network HMOs POS POS Source: Royalty and Solomon (1999)

14. 14 Source: Royalty and Solomon (1999)

15. 15 Plan Switching Households with a chronic condition Households with a chronic condition 4 percentage points more likely to choose the POS 4 percentage points more likely to choose the POS Much less likely to choose the HMO Much less likely to choose the HMO 10 years older… 10 years older… 5 percentage points more likely to choose the POS 5 percentage points more likely to choose the POS Greater income and education Greater income and education More likely to choose the POS More likely to choose the POS Those with no chronic conditions Those with no chronic conditions 4 times more price sensitive 4 times more price sensitive Source: Royalty and Solomon (1999)

16. 16 Take-up Rates Why employer coverage could fall: Why employer coverage could fall: Fewer employers offering coverage Fewer employers offering coverage Fewer workers eligible for coverage Fewer workers eligible for coverage Fewer eligible workers taking offered coverage Fewer eligible workers taking offered coverage Much of the drop in coverage is explained by a drop in take-up rates Much of the drop in coverage is explained by a drop in take-up rates

17. 17 Source: data from Fronstin (2007)

18. 18 Discussion Questions As an insurer, will you be concerned at all about the relative size of the out-of-pocket premium that an employer sets? What sort of actions might you take in the negotiations with the employer over the insurance contract? As an insurer, will you be concerned at all about the relative size of the out-of-pocket premium that an employer sets? What sort of actions might you take in the negotiations with the employer over the insurance contract?

19. 19 Discussion Questions Suppose your state enacted legislation that provided a subsidy to encourage uninsured workers to accept the health insurance coverage their employers offered. What does this chapter say about the effectiveness of such a program? Do you see any difficulties in the implementation of such a plan? Suppose your state enacted legislation that provided a subsidy to encourage uninsured workers to accept the health insurance coverage their employers offered. What does this chapter say about the effectiveness of such a program? Do you see any difficulties in the implementation of such a plan?

20. 20 Discussion Questions In “level-dollar” premium contribution programs, employers makes a fixed contribution to each of the health plans they offer. What is the economic justification for such a program? Who gains and who loses in such a system, relative to one in which employers pay a fixed percentage of the premium? Are there economic reasons why employers may choose to use a fixed percentage approach? In “level-dollar” premium contribution programs, employers makes a fixed contribution to each of the health plans they offer. What is the economic justification for such a program? Who gains and who loses in such a system, relative to one in which employers pay a fixed percentage of the premium? Are there economic reasons why employers may choose to use a fixed percentage approach?

21. 21 Discussion Questions Why would employers pay any portion of the health insurance premium of their employees? Do they pay any portion of employees’ homeowners or auto insurance policies? Why would employers pay any portion of the health insurance premium of their employees? Do they pay any portion of employees’ homeowners or auto insurance policies?