Responses to Health Insurance Premium Increases

A $1 increase in health insurance premiums leads to a 52-cent increase in employee expenditures on health insurance.

As insurance premiums rise, the use of flexible benefit plans, in which employees explicitly choose how to allocate compensation between cash and various benefits, has been increasing in the United States. Currently, approximately 13 percent of workers in medium and large firms are covered by such plans.

In The Reallocation of Compensation In Response to Health Insurance Premium Increases (NBER Working Paper No. 9540), authors Dana Goldman, Neeraj Sood, and Arleen Leibowitz investigate how increases in health insurance premiums affect workers' decisions to reallocate their compensation. They find that a $1 increase in health insurance premiums leads to a 52-cent increase in employee expenditures on health insurance. Employees finance approximately two-thirds of that increase through reduced wages and one-third through reductions in other benefits, such as retirement, life insurance, and disability insurance. Rising health insurance prices not only reduce employee resources for current consumption, but also lower insurance purchases against a variety of risks, potentially leaving employees vulnerable to health, mortality, disability and other significant risks in the long term.

The authors use a dataset consisting of three years (1989-91) of earnings and benefit information for employees under age 65 at a single U.S. company. While the data is ten years old, the period was characterized by rapidly rising health insurance premiums, a situation that is still true today. The 7,896 employees in the sample were geographically dispersed over 47 states. All are single employees, since no information was available on health insurance options available to spouses.

Employees at the firm were given a menu of benefit options and a completely discretionary benefits credit allocation that depended on salary and job tenure. Employees also had the option of cashing out most of their credit allocation. The authors aggregated benefits into three broad categories: wage, health insurance, and other benefits.

The 52-cent increase in health insurance expenditures was financed by a 37-cent reduction in take home wages and a 15-cent reduction in other benefits. Put differently, each 100 percent increase in the price of health insurance leads to a 50 percent increase in employee health insurance expenditures, a 1 percent decrease in take home pay, and a 28 percent decrease in other benefits.

Choosing to absorb health insurance premium increases through reducing take-home pay might reflect the advantage to employees of retaining non-taxed compensation. This suggests that within a flexible benefits plan, employers who trade off wage increases for increases in health insurance premiums are reallocating compensation in a way that workers have shown they prefer.

-- Les Picker