The Impact of Employer Premium Contribution Schemes on the Supply and Demand of Health Insurance

Abstract

This dissertation consists of three essays on health insurance markets, analyzing the impact of employer premium contribution schemes on both the supply and demand sides of the market. The first two essays focus on the supply side, whereas the third essay looks at the demand side.

In the first essay, I present an analytical framework to illustrate the effect of employer premium contribution schemes on health plan pricing. I model the employer-sponsored health insurance market as a differentiated-product oligopoly and study the pricing strategies of insurance plans before and after a policy change in employer premium contribution. I find that the employer premium contribution scheme has a differential impact on health plan pricing based on two market incentives: 1) consumers are less price sensitive when they only need to pay part of the premium increase, and 2) each health plan has an incentive to increase the employer's premium contribution to that plan.

In the second essay, I confirm the theoretical predictions using 1991-2011 data before and after a premium contribution policy change that occurred in 1999 in the Federal Employees Health Benefits (FEHB) Program. Empirical results suggest that both market incentives mentioned above contribute to premium growth. Furthermore, I perform counterfactual analysis to show that average premium would have been 10% less than observed had the subsidy policy change not occurred in the FEHB program, and the federal government would have incurred 15% less in premium contribution.

The third essay looks at how capped employer premium subsidies affect the level of adverse selection among consumers. Previous research suggests that the employer premium contribution scheme can exacerbate or mitigate the level of adverse selection among consumers. Using longitudinal health plan enrollment records of federal civilian employees from years 1997-2000, I present empirical results supporting previous theoretical as well as cross-sectional empirical evidence on the dampening effect of a higher employer premium subsidy cap on adverse selection. The overall level of adverse selection, approximated by the different premium levels enrollees select based on their age, does not change significantly over time in the FEHB program.