Employer-Sponsored Health Insurance: Stable Pools and the Quality of Coverage

1. Employer-Sponsored Health Insurance: Stable Pools and the Quality of Coverage Keith J. Crocker The William Elliott Chaired Professor of Insurance and Risk Management Smeal College of Business Pennsylvania State University University Park, PA 16802

2. Employer-Sponsored Health Insurance • In 2006, approximately 90% of privately- insured, nonelderly Americans received coverage through an employer-sponsored plan • 2010: Patient Protection and Affordable Care Act • “Obamacare” • Beginning in 2014, prohibits pre-existing condition exclusions in which will eliminate the individual and small-employer group market • Employers with >50 employees will have to offer health insurance or pay a fine • Most employers will pay the fine and drop coverage

3. Why Employer-Sponsored Health Care? • Favorable tax treatment • Premiums deducted as a business expense (pre-tax dollars!) • Economies of Scale in the purchase and administration of group policies

4. The Big Question: • Why is there virtually no market for individual insurance policies? • Contrast with the vibrant individual market for life insurance which co-exists with the employer-sponsored life insurance benefit • In 2003, for example, only ¼ of the 20% of Americans without access to an employer plan or public insurance were covered by an individual policy

5. The “Answers”: • The tax subsidy mentioned above • Low demand caused by myopic behavior by young adults • Crowding out of the private market by public insurance programs • Medicaid • SCHIP • The topic of today’s discussion....

6. My2003 RAND Journal Article with John Moran: “Contracting with Limited Commitment: Evidence from Employment-Based Health Insurance Contracts, RAND Journal of Economics, Winter 2003.

7. Classification Risk Consumers Purchase Insurance at the “healthy” premium; Some claims paid All Consumers are Healthy Over Time, Some Stay Healthy While Others Develop “chronic” conditions Depart the Risk Pool to be Re- Underwritten Stay in the Pool and Pay High Premiums “Classification Risk”

8. How Do We Keep the Healthy Individuals in the Risk Pool? • Have consumers sign long-term contracts to remain with the insurer • Historically, non-enforceable • Charge front-loaded premiums, as in whole life insurance • This is a lot more difficulty in health care where future technologies and costs are uncertain

9. A Third Solution…. • Tie Health Insurance to Employment • If it is costly for employees to switch jobs, then it is difficult to move to another employer for a better health insurance deal • The Key Insight: Job market frictions create job attachment which translates into more stable insurance pools.

10. Job Attachment and Stable Insurance Pools • The ability of the healthy to depart and be medically re-underwritten is constrained by their Job Attachment • Healthy workers find it less onerous to be pooled with the unhealthy when there are coverage restrictions • The Hypothesis: There should be a positive relationship between job attachment and the generosity of the health care plan

11. The Data • 1987 National Medical Expenditure Survey (“NMES”) • Lifetime limits on benefits • Annual Stop-Loss • 1977 Dictionary of Occupational Titles • “Specific Vocational Preparation (SVP)” • A measure of specialized job skills

12. Specific Vocational Preparation “The amount of time required to learn the techniques, acquire information and develop the facility needed for average performance in a specific job-worker situation”

13. Representative Occupations by SVP Quartile

18. Conclusions • There is a clear and strong relationship between the stability of the pool, as measured by job attachment, and the ability of insurers to offer more generous healthcare coverage • Proposals to supplant employee group plans with individual market alternatives should be viewed with caution