Selection, Subsidies, and Welfare in Health Insurance: Employer Sponsored Health Insurance Versus the ACA Marketplaces

The 2010 Affordable Care Act (ACA) ushered in some of the largest changes to U.S. healthcare policy over the past few decades. It expanded the sale of individual health insurance, with a set of policies that changed the incentives for the purchase of insurance by individuals: subsidies to encourage moderate-income people to purchase insurance, penalties to incentivize the healthy to purchase, and the establishment of marketplaces, called Health Insurance Exchanges (HIX), to make the purchase of health insurance easier. These incentives were added to the incentives already in place in other segments of the health insurance market, in particular employer-sponsored insurance. Importantly, the tax and subsidy scheme in both markets created incentives for specific types of selection. Higher income people are steered to employer-sponsored insurance by high marginal tax rates, while low and moderate-income people are steered to HIX plans by subsidies.

One of the sectors with the largest expected disruption from the ACA is the small group market (SGM), which generally insures employers with 2-50 covered lives and had 18 million subscribers and $100 billion in revenue in 2013. In this paper we examine the effects of health insurance reform on the SGM. Using simulation methods, we integrate a unique database on SGM choices and claims with other sources of information. We estimate preferences for health insurance plans among people working at small employers. Using the estimated heterogeneous preferences, we examine the impacts on welfare and selection of different counterfactual policies. First, we evaluate the benefits from the SGM relative to having this market eliminated and being faced with HIX plans. In this analysis, we study heterogeneity in choice, selection, and value from the small group market. Second, we consider the impact of counterfactual formulations of the ACA, based on subsidies, tax deductibility, and plan benefits. We find that heterogeneity is important in this setting, with some individuals facing larger gains from the SGM. We also show the extent of adverse selection generated in the SGM because of the creation of the HIX and under the existing policy and alternative policy formulations.