Bending the Cost Curve: Explaining the Recent Slowdown in Premium Growth for Employer-Sponsored Insurance

After years of rapid increases, the premium cost curve for employer-sponsored health insurance has started to show some signs of bending.  Premiums for single coverage grew rapidly in real terms between 1997 and 2005, with peak annual growth rates of 10.4% and 8.6% between 1999 and 2002.  After 2002, growth rates slowed until 2005, when premium levels plateaued through 2008.  In the years since 2008, premiums rose once again, but more slowly than in earlier years. Most recently, premiums exhibited annual growth rates of 2.4% and 1.0% between 2010 and 2012.  Media reports have suggested various reasons for the most recent slowdown, including the rise of high-deductible plans and worsening economic conditions.  To evaluate these hypotheses, we use Oaxaca-Blinder decomposition techniques to examine whether year-to-year premium changes can be explained by the rise in the prevalence of high-deductible plans, other benefit changes, changes in economic conditions, or changes in workforce composition or other employer characteristics. 

To perform this analysis, we use data from the 1999-2012 Medical Expenditure Panel Survey-Insurance Component (MEPS-IC) private sector establishments.  The MEPS-IC contains detailed data on premiums, plan benefits, workforce characteristics, and employer characteristics.  In addition, we merge county-level unemployment rates onto the MEPS-IC to examine the hypothesis that worsening local economic conditions slow premium growth by reducing the market demand for medical care.   With respect to plan benefits, the MEPS-IC collects detailed information on plan type, deductible levels, copayment levels, coinsurance rates, out-of-pocket maximums and a checklist of covered medical services.  It also collects detailed workforce information on the percent of workers that are female, age 50 or older, are in three different wage categories and are union members.  Preliminary estimates document the rapid rise in high-deductible plans, which grew from representing 3.3% of enrollment in 1999 to 30.4% by 2012.  MEPS-IC estimates also show the shift away from HMO plans towards PPO plans, with HMOs representing 33.1% of enrollment in 1997 but only 21.7% in 2012, and PPO’s share of enrollment rising from 34.4% to 65.1%. 

Containing the rise in health care costs is critically important to the U.S.’s long term fiscal health, and national health accounts estimates indicate that growth in total health care expenditures in the U.S. has slowed in recent years – including growth in ESI premiums.  Understanding the forces underlying premium growth may provide a useful perspective for thinking about future premium changes.  To the extent the reduction in premium growth stems from transient macroeconomic factors, we may face faster premium growth as the economy rebounds.    Understanding the extent to which slower growth is attributable to increased cost sharing can help inform policymakers about the possible efficacy of various approaches for bending the long term curve for health care costs.  Our research may also point to concerns about the effect of benefit design on policyholders’ exposure to financial risk.