Heterogeneous Responses to an Increase in Health Insurance Premiums

As health care costs continue to rise, health insurance premiums have also been forced upward. As a result, the number of uninsured Americans has increased. Those who continue to purchase insurance face heavy costs. It is important for policy makers to understand how different groups respond differently to such changes. This study uses a panel data set from a single firm to measure the relative demand for insurance among different groups of employees, based on the variables age, hire date, and salary. It models the responses to an increase in insurance premiums from one year to the next, using these variables and examines the distributive effects of an increase in insurance premiums to determine who is most affected by this increase. The study finds that older, higher-earning employees are less likely to alter their demand for plans that offer more choice, in response to a price increase. Among older workers, salary was less predictive of switching plans, and the rates of switching were uniformly lower. This implies that older employees are more inelastic to both income and price in their demand for health insurance. However, employees who spent more on insurance in the first year were less likely to spend more in the second year, when age and salary were controlled for. This finding, in combination with findings about the patterns of switching among high-wage and low-wage workers, suggests that employees in these two groups face a quantity constraint that restricts the amount of health insurance they are able to purchase. The study concludes that different groups of workers respond differently to increases in health insurance premiums, particularly across differences in age and salary. In order to create effective policy that deals with these price changes, the effects on different groups must be considered separately.