Employer-Based Health Insurance: Setting Employees’ Share

The 2009 Kaiser/HRET employer health benefits survey found that employees pay 17% of the $4,824 annual premium for single coverage and 27% of the $13,375 annual premium for family coverage (all average figures). What determines the employee proportion of the premium?

A plausible purpose of the employee contribution is to take advantage of employee price-sensitivity. All other things equal, the higher the premium faced by an employee, the less likely it is that employee will purchase coverage. A firm can reduce its health care costs to the extent it is successful using price signals to encourage its workers to drop coverage, shift coverage to a less expensive plan within the firm, or to shift coverage to a spouse’s plan from another firm.

Dranove, Spier, and Baker (2000) developed a theoretical model that explains employees’ contribution levels as a source of encouragement on the part of employers for their workers to obtain coverage from their spouses’ employer. The authors found confirming evidence for their model with empirical estimates using 1993-1994 establishment data from at least one employer in each of ten states. The employee proportion of total premium is explained by firm and work force characteristics plausibly related to likelihood of spousal coverage including firm size, proportion of work force that is female, age distribution, full/part time breakdown, union status, wage distribution, flexible spending account offer, and premium level.

Gruber and McKnight (2003) also found empirical evidence based on the 1982-1996 versions of the Current Population Survey to support the hypothesis that as employees’ outside options increase their share of contributions rise. With 1997-2001 MEPS-IC data, Vistnes, Morrisey, and Jensen (2006) found a positive relationship between the proportion of two-earner spouses in the local labor market and employee premium contributions.

Abraham, Vogt, and Gaynor (2006/2007) applied MEPS-IC (1996) data to the question of how households choose among their employer-based insurance options. They found that employee contribution, marital status, wealth, household size, sector (federal vs. non-federal government), number of offers, types of offers (i.e. degree of choice of providers), cost sharing, and income are relevant to the choice. Estimates of own-price elasticity revealed that households are more sensitive to changes in price of plans with the least provider network restrictions. The investigators also note that motivating workers to exit employer plans by increasing the employee contribution may also cause the employer’s risk pool to become more adverse. The resulting higher premiums will partially offset the savings from fewer covered lives.

Finally the authors also consider instances in which firms offer a financial incentive for employees not to enroll in offered coverage (according to the 2009 Kaiser/HRET employer health benefits survey 18% of firms offer incentives for employees to decline coverage). They found that providing a $1,000 payment to workers in one- (two-) offer households is associated with a reduction of 13.3% in the average probability of taking up coverage.

Employer-sponsored health insurance is a good deal for workers, due to the tax subsidy. But the association of health insurance with employment places yet another entity–the employer–between the individual and the health care they obtain. Employers’ interests therefore exert an influence on employee behavior through price signals. That provides an opportunity for another layer of distortion in the health care system, and one that is likely to be with us for a while.


J Abraham, W Vogt, M Gaynor. (2006/2007). How Do Households Choose Their Employer-Based Health Insurance. Inquiry 43:315-332.

D Dranove, K Spier, L Baker. (2000). ‘Competition’ Among Employers Offering Health Insurance. Journal of Health Economics 19:121-140.

J Gruber, R McKnight. (2003). Why Did Employee Health Insurance Contributions Rise? Journal of Health Economics 22: 1085-1104.

The Kaiser Family Foundation and Health Research & Educational Trust. (2009). Employer Health Benefits: Annual Survey.

J Vistnes, M Morrisey, G Jensen. (2006). Employer Choices of Family Premium Sharing. International Journal of Health Care Finance and Economics 6(1):25-47.

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