Employer Contribution and Premium Growth in Health Insurance

In the U.S. most public and private employers offer employees health insurance as a fringe benefit for risk pooling and tax reasons. Employer-sponsored health insurance covered around 60% of all Americans in recent years, with a higher coverage rate among working Americans. The growth rate of health plan premiums, however, has significantly outpaced that of gross domestic product in the past decade. We study whether the employer premium contribution scheme could be another channel that contributes to the rising premiums of health insurance, and whether it has a differential impact on the pricing behavior of health plans depending on their characteristics. We present an analytical framework and model the employer-sponsored health insurance market as a differentiated-product oligopoly, in order to highlight the effect of employer premium contribution schemes on health plan pricing. Using 1991-2011 health plan data before and after a premium subsidy policy change that occurred in 1999 in the Federal Employees Health Benefits Program (FEHBP), we find that the employer premium contribution scheme has a differential impact on health plan pricing based on two market incentives: 1) consumers are less price sensitive when they only need to pay part of the premium increase, and 2) each health plan has an incentive to increase the employer's premium contribution to that plan. Empirical results suggest that both market incentives can contribute to premium growth. Finally, we perform counterfactual analysis to show that average premium would have been 10% less than observed had the subsidy policy change not occurred in FEHBP, and the federal government would have incurred 15% less in premium contribution.