NCPA - National Center for Policy Analysis

Premium Subsidy Programs may not Raise Insured Rates

March 24, 2003

Most employees offered company health insurance take it up. However, roughly one fifth of the estimated 41 million Americans without health insurance are workers who have declined employer-provided coverage. If premium cost is the reason employees decline coverage, subsidizing their share should increase the proportion choosing coverage.

On the other hand, if they are simply young and healthy, for example, they may decide that coverage isn't worth the cost. Thus reducing employees' insurance costs may increase employers' expenses without raising insured rates.

A natural experiment that can be used to test whether plan choice decisions are price elastic occurred when pre-tax premiums for postal employees were introduced in 1994, and other federal employees in 2000.

Until 1994, premium payments were made on a post-tax basis by virtually all federal employees insured through the Federal Employees Health Benefit Program (FEHBP). The FEHBP gives federal employees a choice of private insurance plans with different overages and costs. The federal government pays roughly 75 percent of the premium and the employee the other 25 percent.

Then, in 1994, employees of the postal service were allowed to pay premiums with pre-tax wages -- effectively lowering their cost as much as 45 percent. Other federal employees were given this right in October 2000. The result:

  • The premium tax subsidy had a very small impact on the decision to take up insurance, insuring at most 11,000 to 22,000 new persons.
  • Meanwhile, other insured employees reacted to the lower effective rates by electing higher coverage levels or by covering other family members.
  • As a result, the subsidies significantly raised program costs -- roughly estimated at $700 million dollars.

Thus, the tax change cost $31,000 to $83,000 per newly insured individual. This suggests that premium subsidy programs, such as the Children's Health Insurance Program (S-CHIP) may be costly but ineffective.

Source: Jonathan Gruber and Ebonya Washington, "Subsidies to Employee Health Insurance Premiums and the Health Insurance Market," NBER Working Paper No. 9567, March 2003, National Bureau of Economic Research.

For NBER abstract


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