NCPA - National Center for Policy Analysis

Responding to Health Insurance Premium Hikes

October 21, 2003

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, about 13 percent of workers in medium and large firms are covered by such plans.

When health insurance premiums rise, these employees can directly reallocate their compensation.

A new study from the National Bureau of Economic Research investigates how these employees reacted to premium price increases. According to the authors:

  • A $1 increase in health insurance premiums leads to a $0.52 increase in employee expenditures on health insurance.
  • Employees financed this increase by a $0.37 reduction in take home wages and a $0.15 reduction in other benefits, such as retirement, life insurance and disability insurance.
  • Put another way, a 100 percent increase in the price of health insurance leads to a 50 percent increase in health insurance expenditures, a 1 percent decrease in take home pay, and a 28 percent decrease in other benefits.

The finding that employees choose to absorb health insurance premium increases by reducing take-home pay might reflect the higher value they place on retaining non taxed compensation, say the authors. This suggests that within a flexible benefits plan, employers who absorb some of the increased cost of health insurance premiums in lieu of wage increases for workers are reallocating compensation in a way that workers have shown they prefer.

Source: Les Picker, "Responses to Health Insurance Premium Increases," NBER Digest, August 2003; based upon Dana Goldman, Neeraj Sood and Arleen Leibowitz, "The Reallocation of Compensation in Response to Health Insurance Premium Increases," Working Paper No. 9540, March 2003, National Bureau of Economic Research.

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