Employee demand for health insurance and employer health benefit choices

As purchasers of the majority of private health insurance in the U.S., employers play an important role in choosing health insurance for the under sixty-five population. In this study, I examine the economic incentives facing employers choosing health benefits for employees with heterogeneous preferences for coverage with the objective of determining how the role of the employer affects the health insurance workers receive. I develop and empirically test a theoretical model of employer health benefit purchasing behavior. I find that, while employers have incentives to choose the types of plans employees prefer, heterogeneity among employees in demand for health insurance is costly to employers. The implication is that many individuals with employer-sponsored health insurance receive a plan that deviates from their optimal choice as employers balance the costs of not providing workers with their optimal allocation between wages and health insurance with the incremental costs of providing additional plans. I also find that the institutional features of the employer-sponsored market—the tax treatment of employee premium contributions, combined with nondiscrimination requirements—reduce the extent to which employers offer employees a choice of plans as well as the extent of product variation in the health plan market. I find empirical evidence supporting the theoretical model of employer health benefit choices as a response to employee demand for health insurance. Both the level and variation of characteristics of employees within a firm that affect their demand for health insurance are determinants of the level and variation of the generosity of the health benefits offered by employers. In addition, both establishment and firm size affect employer decisions about whether to offer health insurance, the number of plans offered, and the use of employee premium contributions. The results also demonstrate that characteristics of local labor markets that affect individual demand for health insurance, such as the availability of uncompensated care, also affect employer decisions. I conclude that, in general, employer choices reflect employee preferences for health insurance. However, heterogeneity among employees may result in some workers not receiving the health insurance they desire from their employer. I discuss the implications for employers and policymakers.