Premium cross-subsidization and choice in the group health insurance market

The uninsured population has increased from 12.9% of the U.S. population in 1987 to 16.1% in 1997 (Bureau of Census, 1999). Employer-provided health insurance has declined during this period in part because of the increasing cost of insurance. This study investigates the implications of group health insurance plan choice on premium cross-subsidization in the group insurance market.; Two research hypothesis are tested. The first hypothesis is that the degree of premium cross-subsidization in a firm which offers multiple health plans is lower than that of a similar firm which offers only one health plan. This hypothesis is tested by comparing the differences in the unit price of the received indemnity benefit for each policy. It is anticipated that the unit price differences between high and low risks will be smaller when plan choice is present due to individual's self-selection into different health plans based on their risk types. The second hypothesis is that cash wages for high-risk employees working in firms that offer multiple health plans are lower than for similar employees working in firms that offer only one health plan option.; This study finds mixed results for changes in premium cross-subsidization when plan choice is available. Premium cross-subsidization between people of different genders, educational levels and health statuses decreases when employers offer a choice of health insurance plans. However, the level of subsidization received by people with chronic disease is even more pronounced in the presence of plan choice. No resulting wage effect is found corresponding to the changes in premium cross-subsidization. The lack of a wage effect finding might be due to our inability to control for some factors that affect employees' wages. Those factors include other employee benefits, the worker's skill level, and the financing method of employers' contribution to the health insurance premium.