Health Benefit Downward Rigidity: Employers’ Responses to Rising Insurance Costs

• Published date: 01 September 2015
• DOI: http://doi.org/10.1111/rmir.12047
• Date: 01 September 2015

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2015, Vol.18, No. 2, 217-241

DOI: 10.1111/rmir.12047

PERSPECTIVE

HEALTH BENEFIT DOWNWARD RIGIDITY:EMPLOYERS’

RESPONSES TO RISING INSURANCE COSTS

Xuguang Guo

Ran Tao

ABSTRACT

The article examines employers’ responses to rising insurance costs using Cen-

sus BureauMedical Expenditure Panel Survey–Insurance Component data from

1997 to 2005. The findings confirm that employers did not take dramatic actions

to reduce benefit in response to the rising insurance cost during our study pe-

riod. Most employers did not drop health insurance coverage, reduce workers’

eligibility for insurance, or substantially scale back their health insurance cov-

erage. Instead, companies controlled the insurance cost in more subtle ways

by adopting cost-efficient health plans and requesting employee contribution

to the insurance premium and out-of-pocket expenses for medical treatments.

Our results show that the effect of those tactics was limited. The share of em-

ployee spending did not rise along with the growth of insurance premiums.

Employers absorbed a large portion of the increased insurance cost.

Before the mandatory rules of Patient Protection and Affordable Care Act (PPACA)

(2010) take effect in 2015, employers in most states have no legal obligations to of-

fer health insurance to their workers.1Offering employer-provided health insurance

(EPHI) is considered as free of choice for employers (Pauly, 1997; Summers, 1989). Al-

though many state laws limit employers’ autonomy once they offer health care benefits,

employers are believed to be flexible in adjusting the level of the benefits (Sommers,

Xuguang Guo works at the Management and Human Resources Department, College of Busi-

ness Administration, California State Polytechnic University; e-mail: xuguangguo@cpp.edu. Ran

Tao works at the Economics Department, College of Business and Economics, University of

Wisconsin–Whitewater. The authors thank John Burton for his invaluable advice. The authors

also thank Paula Voos,Steven Director, Douglas Kruse, and Mark Killingsworth for their helpful

comments. The data were provided by the Center for Economics Studies of the United States

Census Bureau. The authors are grateful to Alice Zawacki, Frank Limehouse, and Rosemary

Hyson for providing access to the data and their assistance in the research. The research was

conducted while the first author was a Special Sworn Status researcher of the U.S. Census Bureau

at the New York Census Research Data Center and Chicago Census Research Data Center. The

research results and conclusions expressed arethose of the authors and do not necessarily reflect

the views of the Census Bureau. This article has been screened to ensure that no confidential data

are revealed.

1Except for Massachusetts and Hawaii.

217

218 RISK MANAGEMENT AND INSURANCE REVIEW

FIGURE 1

Employers’ Spending on EPHI, 1950—2005 (in 1982–1984 Medical Care Billion Dollar

and as Percentage of Payroll)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

20

40

60

80

100

120

140

160

180

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

$Billion % of Payroll

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Tables, 3.6, 6.11, and 6.3.

2005; Vistens and Selden, 2011). Current literature suggests that companies should drop

or scale back their EPHI benefit when the insurance premium increases (Enthoven and

Fuchs, 2006; Fronstin, 2007; Moran, 2005). However, there is no empirical evidence that

supports the trend of declining employers’ expenditure and coverage on EPHI in the

United States.

According to Kaiser/HRET annual reports (Kaiser/HRET, 1999–2007), the growth of

the premiums for EPHI has been much higher than the growth of GDP, workers’ earn-

ings, and inflation in the last few decades. The national aggregate data nonetheless

suggest that employers’ spending on EPHI has steadily increased since 1950s. As Figure

1 indicates, employers’ expenditure for health insurance increased from $4.9 billion (in

1982–1984 medical dollar) in 1950 to $154 billion in 2005. EPHI spending as a percent-

age of payroll also increased from 0.48 percent to 8.67 percent during the same period.

According to annual surveys from Kaiser,approximately 95 percent of employers hiring

50 or more workers consistently offered health insurance from 1999 to 2009 despite the

two recessions and the rapid growth of EPHI premium.

Researchers have mostly ignored that employers may be subject to downward health

benefits rigidity. Increasing wages or benefits are usually well accepted by workers, but

taking away those compensation packages may encounter strong resistance. Existing