What Drove First Year Premiums in Stand-Alone Medicare Drug Plans?

Medicare's Part D offers heavily subsidized new drug coverage to 22.5 million seniors to date, of whom 16.5 million are in stand-alone drug plans (Department of Health and Human Services, 2006). The government delegated the delivery of the benefit to private insurance companies arguing that market incentives would lead them to provide coverage at the lowest price possible. The massive entry of plans and the large variety of actuarial designs and formularies offered make it complicated to assess how insurers set premiums during this first year of the program. This paper presents the first econometric evidence on whether premiums in the stand-alone drug plan markets are driven by the relevant factors predicted by insurance theory. Using data gathered from the Centers for Medicare and Medicaid Services, we measure a plan's generosity as the simulated out of pocket payments for different sets of drugs. We also identify the listed full drug prices by each insurer and merge these with other plan and geographical characteristics to test predictions about how insurers set premiums. We find evidence that a) the number of insurers in a market is big enough such that it does not appear to influence premiums, b) the full drug prices listed appear to be reflected to some degree in the premiums charged c) plan characteristics such as the provision of extra coverage are reflected in higher premiums, but overall there is a weak relationship between premiums and simulated out of pocket payments for different sets of drugs d) the institutional setting and regional market characteristics affect the firms' bidding behavior and their resulting premiums. Insurers appear to have responded strongly to program incentives such as the automatic enrollment of dual Medicaid-Medicare beneficiaries into low cost plans. As data for 2007 are made available, it will be important to see if plans follow similar pricing strategies in subsequent years of this program.

Health Insurance Coverage and the Macroeconomy

The primary objective of this paper is to improve our understanding of the historic relationship between state and national macroeconomic climate and the health insurance coverage of Americans. The secondary objective of this paper is to use the historic findings to estimate how the number of uninsured Americans changed during the 2001 recession, and to estimate whether to date enough people have gained health insurance during the current recovery to offset the losses during the recession. We conclude that the macroeconomy (measured by state unemployment rate and real gross state product) is correlated with the probability of men's health insurance coverage and that this correlation is only partly explained by changes in men's employment status. Counter-cyclical health insurance programs such as Medicaid and the State Children's Health Insurance Program seem to ensure that the health insurance coverage of women and children is insulated from macroeconomic changes. We estimate that 851,000 Americans, the vast majority of whom were adult men, lost health insurance due to macroeconomic conditions alone during the 2001 recession.

Who Gets What from Employer Pay or Play Mandates?

Critics of pay or play mandates, borrowing from the large empirical minimum wage literature, provide evidence that they reduce employment. Borrowing from a smaller empirical minimum wage literature, we provide evidence that they also are a blunt instrument for funding health insurance for the working poor. The vast majority of those who benefit from pay or play mandates which require employers to either provide appropriate health insurance for their workers or pay a flat per hour tax to offset the cost of health care live in families with incomes twice the poverty line or more and, depending on how coverage is determined, the mandate will leave a significant share of the working poor ineligible for such benefits either because their hourly wage rate is too high or they work for smaller exempt firms.

The Impact of the Macroeconomy on Health Insurance Coverage: Evidence from the Great Recession

This paper investigates the impact of the macroeconomy on the health insurance coverage of Americans using panel data from the Survey of Income and Program Participation (SIPP) for 2004-2010, a period that includes the Great Recession of 2007-09. We find that a one percentage point increase in the state unemployment rate is associated with a 1.67 percentage point (2.12%) reduction in the probability that men have health insurance; this effect is strongest among college-educated, white, and older (50-64 year old) men. For women and children, health insurance coverage is not significantly correlated with the unemployment rate, which may be the result of public health insurance acting as a social safety net. Compared to the previous recession, the health insurance coverage of men is more sensitive to the unemployment rate, which may be due to the nature of the Great Recession.

Medicaid Expansions and Fertility in the United States

Beginning in the mid 1980s and extending through the early to mid 1990s, a substantial number of women and children gained eligibility for Medicaid through a series of income-based expansions. Using natality data from the National Center for Health Statistics, we estimate fertility responses to these eligibility expansions. We measure changes in state Medicaid eligibility policy by simulating the fraction of a standard population that would qualify for benefits. From 1985 to 1996, the fraction of women aged 15 to 44 who were eligible for Medicaid coverage for a pregnancy increased on average by 24 percentage points. However, contrary to findings in the extant literature, our results do not indicate that this expansion in coverage had a statistically discernible effect on fertility.

The Effect of State Workers' Compensation Program Changes on the Use of Federal Social Security Disability Insurance

In addition to traditional forms of private and public medical insurance, two other large programs help pay for costs associated with ill health. In 2007, Workers Compensation (WC) insurance provided $55.4 billion in medical care and cash benefits to employees who are injured at work or contract a work-related illness, and Social Security Disability Insurance (DI) provided$99 billion to individuals who suffer from permanent disabilities and are unable to engage in substantial gainful activity. During the 1990s, real DI outlays increased nearly 70 percent, whereas real WC cash benefit spending fell by 12 percent. There has been concern that part of this relationship between two of the nation’s largest social insurance programs may be due to individuals substituting towards DI as state WC policies tightened. We test this hypothesis using a number of different WC and DI program parameters. We first show that this negative correlation between the national series does not hold over time within states, the level at which a causal relationship should operate. We then test how regulatory changes in state WC program parameters impact WC outcomes (intended effect) and DI outcomes (unintended effect). We find no compelling evidence of WC tightening causing DI rolls to increase, and conclude it is unlikely that state WC changes were a meaningful factor in explaining the rise in DI.

The Impact of Income on the Weight of Elderly Americans

This paper tests whether income affects the body weight and clinical weight classification of elderly Americans using a natural experiment that led otherwise identical retirees to receive significantly different Social Security payments based on their year of birth. We exploit this natural experiment by estimating models of instrumental variables using data from the National Health Interview Surveys. The model estimates rule out even moderate effects of income on weight and on the probability of being underweight or obese, especially for men.

Measuring the Impact of Health Insurance on Levels and Trends in Inequality

A substantial part of the inequality literature in the United States has focused on yearly levels and trends in income and its distribution over time. Recent findings in that literature show that median income appears to be stagnating with income growth primarily coming at higher income levels. But the value of health insurance is an important and growing source of economic well being for American households that is missed by focusing solely on income. In this paper we take estimates of the value of different types of health insurance received by households and add them to usual pre tax post transfer measures of income from the Current Population Survey's March Annual Demographic Supplement for income years 1995-2008 to investigate their impact on levels and trends in measured inequality. We show that ignoring the value of health insurance coverage will substantially understate the level of economic well being of Americans and its upward trend and overstate the level of inequality and its upward trend. As an application of our fuller measure of income, we consider how two provisions of current health reform proposals to expand health insurance affect the level and distribution of economic well being.

Where Do the Sick Go? Health Insurance and Employment in Small and Large Firms

Small firms that offer health insurance to their employees may face variable premiums if the firm hires an employee with high-expected health costs. To avoid expensive premium variability, a small firm may attempt to maintain a workforce with low-expected health costs. In addition, workers with high-expected health costs may prefer employment in larger firms with health insurance rather than in smaller firms. This results in employment distortions. We examine the magnitude of these employment distortions in hiring, employment, and separations, using the Medical Expenditure Panel Survey from 1996 to 2001. Furthermore, we examine the effect of state small group health insurance reforms that restrict insurers’ ability to deny coverage and restrict premium variability on employment distortions in small firms relative to large firms. We find that workers with high-expected health cost are less likely to be new hires in small firms that offer health insurance, and are less likely to be employed in insured small firms. However, we find no evidence that state small group health insurance reforms have reduced the extent of these distortions. Estimating the magnitude of employment distortions in insured small firms is essential in refining reforms to the small group health insurance market. The difficulties that small firms face in obtaining and maintaining health insurance for their employees have been widely documented (Brown, Hamilton and Medoff, 1990; McLaughlin,1992; Fronstin and Helman, 2000). Only 45% of firms with fewer than 50 employees offer health insurance compared to 97% of firms with 50 or more employees (AHRQ, 2002). This low proportion has been attributed, in part, to the high administrative cost of health insurance for small firms, the low demand for insurance among workers in these firms, and the unwillingness of insurers to take on small firm risks (McLaughlin, 1992, Fronstin and Helman, 2000, Monheit and Vistnes, 1999). In recent decades, small firms that provide health insurance to their employees were in a precarious position. Their premiums were calculated yearly, based on the expected value of their health care utilization. Hence, a single high cost employee could lead to a substantial surcharge on the premiums for the firm (Zellers, McLaughlin, and Frick, 1992). In a survey of small employers that did not offer health insurance, 75 percent claimed that an important reason for not offering insurance was high premium variability (Morrisey, Jensen and Morlock, 1994). Concerns about these problems fueled the passage of numerous state small group health insurance reforms in the 1990s that implemented premium rating reforms and restrictions on pre-existing condition exclusions. While a few states have implemented premium rating reform that has severely restricted small group insurers’ ability to use health status to set premiums, in most states, these reforms have been moderate. Assuming that firms are unable to perfectly tailor individual wages to individual health insurance costs, unexpectedly high premiums may impose a large burden on small firms. Paying high premiums, possibly financed by borrowing at high interest rates, may increase the risk of bankruptcy. If small firms choose not to pay high premiums, and instead drop insurance coverage, they renege on the implicit compensation contract with workers. Employers may opt to raise employee contributions to cover higher costs but large increases may lead to healthier employees dropping coverage. Faced with this predicament, small firms may choose to prevent expensive premium variability by maintaining a work force that has a low-expected utilization of health care services. Thus, the link between employment and health insurance in small firms may result in a welfare loss if it prevents individuals with high-expected health costs from being employed in small firm jobs in which they may have high match specific productivity. Employers may obtain information about employees’ medical conditions in several ways. Before the passage of the 1990 Americans with Disabilities Act (ADA), half of all employers conducted pre-employment medical examinations (U.S. Congress, 1988). Most small group employers required the completion of a family health questionnaire for insurance coverage (Zellers et al., 1992, Cutler 1994). While ADA now restricts employer inquiries on employee health, it does not apply to firms with under 15 employees. In addition, employer compliance with the ADA may be hindered because its stipulations about pre-employment health inquiries are vague. Medical inquires are allowed if they pertain to the applicant’s ability to perform the job. In addition, medical information is explicitly allowed in the use of medical underwriting for insurance (Epstein, 1996). The media continues to report cases where employers easily obtain employee medical records (Rubin, 1998), or employees have been laid-off because of high health costs (O’Connor, 1996), or employee premiums have been adjusted to reflect the employee’s claims experience (Kolata, 1992). The Health Insurance Portability and Accountability Act of 1996 (HIPAA) includes a nondiscrimination provision that bars a group health plan or issuer from discriminating in eligibility or contributions on the basis of a health status-related factor. However, HIPAA allows medical underwriting and allows insurers to rate groups of employees based on health status as long as the premium rate for all employees is blended. This stipulation prevents employers from requiring higher cost employees to contribute a higher premium share, but does not shield employers from bearing the costs for a sick worker. Economists have typically believed that health insurance is an attribute of “good jobs” and workers do not choose jobs based on whether or not the job provides health insurance. In fact, this precept is behind the notion that employment is a mechanism for minimizing adverse selection in the market for health insurance (see, for example, Gruber and Levitt, 2000). However, a number of recent studies have suggested that worker demand for health insurance may play an important role in employment decisions. Workers with high-expected family costs may prefer jobs that offer health insurance, and conversely, workers with low preferences for health insurance may sort into jobs that lack health insurance. (Monheit and Vistnes, 1999, Monheit and Vistnes, 2006, Royalty and Abraham, 2005, Bundorf and Pauly, 2004). In this paper, we use the Medical Expenditure Panel Survey (MEPS) from 1996 to 2001 to examine the magnitude of employment distortions for workers with high-expected health costs. Since health insurance and employment are linked, health insurance may be an important determinant of employment outcomes. High-expected health costs may reduce the probability that workers are employed in firms where they have the highest match specific productivity. We estimate the magnitude of distortions in hiring, employment, and separations. Furthermore, we examine the effect of state small group health insurance reforms that restrict insurers’ ability to deny coverage and restrict premium variability on employment distortions in small firms relative to large firms. Estimating the magnitude of employment distortions in insured small firms and understanding the effect of small group regulation on these distortions is essential in deciding optimal public policy towards the small group health insurance market.