The Incidental Economist

The following originally appeared on The Upshot (copyright 2017, The New York Times Company).

The basic structure of the American health care system, in which most people have private insurance through their jobs, might seem historically inevitable, consistent with the capitalistic, individualist ethos of the nation.

In truth, it was hardly preordained. In fact, the system is largely a result of one event, World War II, and the wage freezes and tax policy that emerged because of it. Unfortunately, what made sense then may not make as much right now.

Well into the 20th century, there just wasn’t much need for health insurance. There wasn’t much health care to buy. But as doctors and hospitals learned how to do more, there was real money to be made. In 1929, a bunch of hospitals in Texas joined up and formed an insurance plan called Blue Cross to help people buy their services. Doctors didn’t like the idea of hospitals being in charge, so some in California created their own plan in 1939, which they called Blue Shield. As the plans spread, many would purchase Blue Cross for hospital services, and Blue Shield for physician services, until they merged to form Blue Cross and Blue Shield in 1982.

Most insurance in the first half of the 20th century was bought privately, but few people wanted it. Things changed during World War II.

In 1942, with so many eligible workers diverted to military service, the nation was facing a severe labor shortage. Economists feared that businesses would keep raising salaries to compete for workers, and that inflation would spiral out of control as the country came out of the Depression. To prevent this, President Roosevelt signed Executive Order 9250, establishing the Office of Economic Stabilization.

This froze wages. Businesses were not allowed to raise pay to attract workers.

Businesses were smart, though, and instead they began to use benefits to compete. Specifically, to offer more, and more generous, health care insurance.

Then, in 1943, the Internal Revenue Service decided that employer-based health insurance should be exempt from taxation. This made it cheaper to get health insurance through a job than by other means.

After World War II, Europe was devastated. As countries began to regroup and decide how they might provide health care to their citizens, often government was the only entity capable of doing so, with businesses and economies in ruin. The United States was in a completely different situation. Its economy was booming, and industry was more than happy to provide health care.

This didn’t stop President Truman from considering and promoting a national health care system in 1945. This idea had a fair amount of public support, but business, in the form of the Chamber of Commerce, opposed it. So did the American Hospital Association and American Medical Association. Even many unions did, having spent so much political capital fighting for insurance benefits for their members. Confronted by such opposition from all sides, national health insurance failed — for not the first or last time.

In 1940, about 9 percent of Americans had some form of health insurance. By 1950, more than 50 percent did. By 1960, more than two-thirds did.

One effect of this system is job lock. People become dependent on their employment for their health insurance, and they are loath to leave their jobs, even when doing so might make their lives better. They are afraid that market exchange coverage might not be as good as what they have (and they’re most likely right). They’re afraid if they retire, Medicare won’t be as good (they’re right, too). They’re afraid that if the Affordable Care Act is repealed, they might not be able to find affordable insurance at all.

This system is expensive. The single largest tax expenditure in the United States is for employer-based health insurance. It’s even more than the mortgage interest deduction. In 2017, this exclusion cost the federal government about $260 billion in lost income and payroll taxes. This is significantly more than the cost of the Affordable Care Act each year.

This system is regressive. The tax break for employer-sponsored health insurance is worth more to people making a lot of money than people making little. Let’s take a hypothetical married pediatrician with a couple of children living in Indiana who makes $125,000 (which is below average). Let’s also assume his family insurance plan costs $15,000 (which is below average as well).

The tax break the family would get for insurance is worth over $6,200. That’s far more than a similar-earning family would get in terms of a subsidy on the exchanges. The tax break alone could fund about two people on Medicaid. Moreover, the more one makes, the more one saves at the expense of more spending by the government. The less one makes, the less of a benefit one receives.

The system also induces people to spend more money on health insurance than other things, most likely increasing overall health care spending. This includes less employer spending on wages, and as health insurance premiums have increased sharply in the last 15 years or so, wages have been rather flat. Many economists believe that employer-sponsored health insurance is hurting Americans’ paychecks.

There are other countries with private insurance systems, but none that rely so heavily on employer-sponsored insurance. There are almost no economists I can think of who wouldn’t favor decoupling insurance from employment. There are any number of ways to do so. One, beloved by wonks, was a bipartisan plan proposed by Senators Ron Wyden, a Democrat, and Robert Bennett, a Republican, in 2007. Known as the Healthy Americans Act, it would have transitioned everyone from employer-sponsored health insurance to insurance exchanges modeled on the Federal Employees Health Benefits Program.

Employers would not have provided insurance. They would have collected taxes from employees and passed these onto the government to pay for plans. Everyone, regardless of employment, would have qualified for standard deductions to help pay for insurance. Employers would have been required to increases wages over two years equal to what had been shunted into insurance. Those at the low end of the socio-economic spectrum would have qualified for further premium help.

This isn’t too different from the insurance exchanges we see now, writ large, for everyone. One can imagine that such a program could have also eventually replaced Medicaid and Medicare.

There was a time when such a plan, being universal, would have pleased progressives. Because it could potentially phase out government programs like Medicaid and Medicare, it would have pleased conservatives. When first introduced in 2007, it had the sponsorship of nine Republican senators, seven Democrats and one independent. Such bipartisan efforts seem a thing of the past.

We could also shift away from an employer-sponsored system by allowing people to buy into our single-payer system, Medicare. That comes with its own problems, as The Upshot’s Margot Sanger-Katz has written. She also has covered the issues of shifting to a single-payer system more quickly.

It’s important to point out that neither of these options has anything even close to bipartisan support.

Without much pressure for change, it’s likely the American employer-based system is here to stay. Even the Affordable Care Act did its best not to disrupt that market. While the system is far from ideal, Americans seem to prefer the devil they know to pretty much anything else.

@aaronecarroll

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My middle son became a Bar Mitzvah this last weekend, so I’m in major catch-up mode. Sorry! I forgot to post when this appeared, so I’m making up for it now.

Not long ago, an interesting study appeared that shows that as employer-sponsored insurance has become expensive, many more children are actually being covered by public programs. It’s not a great sign for the private insurance market, regardless of what you think of the ACA. Go read about it over at the AcademyHealth blog!

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The December 2014 issue of the Journal of Health Economics had a special section on health insurance and public sector labor markets. TIE research assistant Garret Johnson worked up brief summaries of papers in that section, which you’ll find here. Below are some observations about job lock based on his summary. (Some prior TIE coverage of job lock is here.)

Clark and Mitchell analyzed 6,650 respondents to the Health and Retirement Study survey to investigate the relationship between retiree health coverage among public sector employees and private household wealth accumulation. Those covered by retiree health plans reported less wealth accumulated than similar private sector workers without retiree coverage. Controlling for socioeconomic factors and pension funds, federal workers had $116,000 less wealth and state and local government workers had $35,000 less wealth, relative to workers without retiree health insurance.  (The former was statistically significant, the latter not, possibly due to small sample size.)

It’s plausible that individuals anticipate their retirement health care needs and expenses and accumulate greater savings when they have less coverage for it. One way to accumulate greater savings is to work longer. So, this naturally leads to the idea of job lock: when one does not have retiree health care coverage, one works longer, both for the health insurance available as a worker and in order to accumulate greater savings for health care expenses upon retirement.

Note that there are two other ways to get this result, however. First, workers without retiree health coverage stay in their jobs for the health benefits (job lock). A consequence of that is that they accumulate greater savings, but they do so without anticipating future health care expenses. It’s just a passive consequence. Second, organizations that aren’t funding retiree health benefits (a form of deferred compensation) may make up for the loss in compensation with higher wages or larger pension contributions, leading to greater savings. Clark and Mitchell controlled for this possibility, however.

Fitzpatrick found such a job lock effect among Illinois Public School employees. Illinois introduced retiree health coverage (called THRIP) for teachers in 1980 and Fitzpatrick examined the effects on retirement age of doing so. Before THRIP, exit rate of teachers was highest at age 65 (probability of retirement: 0.51). After THRIP, the exit rate of teachers at 65 decreased 40%, (probability of retirement 0.29). Meanwhile, exit rate of teachers at age 55 jumped 81% (from probability of retirement of 0.054 to 0.098).

These findings suggest that employees shift the timing of their retirement in response to the availability of pre-Medicare retiree health benefits. Again, this could be due to two effects: the availability of coverage without working and the less need to save up for future health care costs.

Shoven and Slavov found something similar. They used Health and Retirement Study data to examine the effects of retiree health insurance on likelihood of retiring for public and private sector employees. They found that retiree health coverage is associated with a 4.3% increase over 2 years in probability of leaving full-time employment between ages 55-59 (largely shifting to part-time work) and a 6.7% increase over 2 years in probability of leaving full-time employment between ages 60-64 (largely leaving the labor force). Among private sector employees, the effects are smaller, 2.3% and 5.8%, respectively, but the difference between public and private employees is not statistically significant.

None of this is surprising, and it’s consistent with prior work on job lock.

@afrakt

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Links to all posts in the series to which this post belongs are in the introductory post. 

From this series’ review of the job lock literature and Nicholas Bagley’s review of the relevant legal landscape, as well as how the ACA changes it, I draw the following conclusions:

• There’s strong theoretical reason to expect some job lock, but the theory can’t tell us how big an effect it has on the labor market.
• Job lock exists because of the legal and regulatory structure we’ve chosen to impose on the health insurance and labor markets.
• With near unanimity, the empirical literature has found evidence that employer-sponsored health insurance reduces the likelihood of retirement. This is consistent with one form of job lock. However, it is worth keeping in mind that people also don’t retire because health benefits, like wages, are a form of compensation. The job lock effect and the compensation effect are different, though potentially confounded in some studies.
• There is also strong evidence that employer-sponsored health insurance increases the labor force participation of prime-aged workers, while spousal coverage reduces it. Moreover, sicker individuals are more likely to work more at jobs that provide their source of coverage. Such results are consistent with job lock.
• Studies are more mixed on the effect of employer-sponsored health insurance on job mobility (as distinct from labor force participation), but the balance of results in the literature are consistent with this form of job lock.
• Entrepreneurship lock—that individuals are less likely to elect to become self-employed because of the greater value of employer-sponsored health insurance relative to what they can access on the individual market—is another variant of job lock identified in the literature. Here too, the vast majority of studies find evidence consistent with it.
• In several ways the ACA will mitigate job and entrepreneurship lock.

Finally, here’s a bonus bit of survey evidence from the Urban Institute:

To all this, consider the following additional considerations and caveats: Each estimate of job lock only pertains to one type (labor force participation, job mobility, entrepreneurship lock) and, usually, to a subset of the population for whom it might be relevant. As such, no single estimate is comprehensive of the entire phenomenon. Moreover, for cases for which there are multiple, comparable estimates, nobody has done a meta-analysis. Consequently, it is not clear what is the “right” point estimate for each variant of job lock. Nor is it clear what the overall labor market effects are, quantitatively and precisely.

The ACA only addresses certain, but not all, conditions that give rise to job lock and not completely. If you combine this fact with the prior paragraph, you’ll notice that we have a situation in which we neither fully know the extent of the problem nor the extent to which the ACA will address it. In their 2002 literature review, Gruber and Madrian also commented on the fact that we do not know the full welfare implications of job lock. As best I can tell, the literature has not advanced in this regard since their review.

Nevertheless, the labor market distortions of the pre-ACA insurance landscape (some of which remain) are real. They weighed heavily on the minds of economists and, to some extent, motivated some of the provisions of the health reform law.

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Links to all posts in the series to which this post belongs are in the introductory post. This post is jointly authored by Nicholas Bagley and Austin Frakt.

As the posts in this series have shown, the available studies provide ample support for the theoretical prediction that many people will experience job lock. In an ideal world, the fear of losing employer-sponsored health insurance shouldn’t drive decisions about where, whether, or how much to work. Attentive to that concern, the drafters of the ACA took a number of steps to mitigate job lock.

Most fundamentally, the Act prohibits any health plan—employer-sponsored or not—from refusing to cover a preexisting condition. (Only grandfathered plans get a pass.) Employers can still impose up to a 90-day “waiting period” before a group health plan kicks in, but that’s it. The elimination of preexisting-condition exclusions should ease somewhat the concerns of workers who might have hesitated to switch jobs because, if they had a gap between jobs of more than two months, a new employer could have declined to cover such a condition for up to a year.

Of even greater importance, the Act revolutionizes the individual market for private insurance. By prohibiting medical underwriting and guaranteeing issue, the ACA makes it more likely that those with preexisting conditions or high anticipated medical expenses can find affordable insurance in the private market. That should encourage those workers to retire earlier, to switch to firms that don’t offer health coverage, or to become entrepreneurs. The overall effect on job lock will be mixed, however. Community rating will make exchange plans more expensive for the young and healthy, which may discourage them from ditching their employer-sponsored coverage.

In any event, employer-sponsored coverage will still be tax-advantaged, meaning that many people will still prefer to get coverage through their employers. That’s particularly true for higher-income individuals for whom the tax exclusion is especially valuable. As a result, job lock won’t go away altogether. On the other hand, the Cadillac tax will gradually claw back some of the tax advantages of more plans over time, beginning with those with very high premiums.

For those under 400% of the poverty line, however, the ACA extends tax credits and cost-sharing subsidies to buy exchange plans. Those credits and subsidies will partly offset the exclusion, mitigating job lock. For low-income workers, the effect could be particularly dramatic: the subsidized cost of insurance on an exchange may be lower than the wage reduction necessary to purchase employer-sponsored coverage. For those workers, exchange coverage could be a better deal than employer-sponsored coverage. Indeed, such workers might shy away from jobs that offer such coverage and pay commensurately less than alternative employment with fewer benefits.

For those under 133% of the poverty line, the expanded availability of Medicaid coverage—at least in states that have expanded their Medicaid programs—could also diminish job lock. Consider the breadwinner in a family of four making just $30,000 at a job that offers health coverage. Prior to the ACA, he or she may have been unable to afford a job at a comparable wage that didn’t offer health coverage. With Medicaid as a fallback, a different job at the same wage would be considerably more attractive.

The ACA also encourages small employers to provide employer-sponsored coverage, which could make it more attractive for workers to take a job with a small firm. The Act extends sizeable tax credits to employers with fewer than 25 employees that offer health coverage. By eliminating medical underwriting, the Act should make it easier for small firms with bad claims experience to secure affordable coverage. (Some firms with good claims experience, however, will see their premiums go up.) The Act also organizes the market for small-business coverage onto an exchange—a SHOP exchange—which, by encouraging price transparency and making it easier to shop for coverage, may encourage small employers to offer health coverage to their workers.

Finally, the ACA broadens a rule that makes the tax exclusion available only to those employers that don’t discriminate in favor of highly compensated workers. Previously, the rule only applied to self-insured employers, which allowed fully insured employers to offer health plans to only a slice of their workforce and still take advantage of the tax exclusion. Once the IRS issues rules to implement the non-discrimination rule, those fully insured firms will have a tax incentive to offer coverage to most of their workforce—including to lower-income workers who might otherwise have been reluctant to take a job with the firm.

Putting all these and other ACA reforms together, the law should substantially reduce job lock. At the same time, we can confidently say it won’t eliminate it. For some people—particularly those with incomes too high for exchange subsidies and who also benefit substantially from the exclusion of employer-sponsored insurance premiums from income taxation—coverage through work will still be the best deal possible. And a lot of small firms still won’t offer coverage, which may lock those people into jobs that offer health coverage.

Quantifying how much the ACA will remove job lock requires extrapolating the research findings to a post-ACA world. That involves some educated guesswork, but Linda Blumberg, Sabrina Corlette, and Kevin Lucia have taken a run at one aspect of the problem and based estimates of what the ACA will do for entrepreneurship and self-employment on some of the entrepreneurship-lock literature covered earlier in the series. They “make a rough estimate that the number of self-employed individuals will increase by about 1.5 million, a relative  increase of more than 11 percent.”

That’s a step in the right direction. Even after the ACA, however, job lock will remain an issue. Indeed, it will remain an issue, at least to some extent, so long as employer-sponsored coverage is subject to different rules than coverage secured in the private market. When it comes to job lock, the ACA is just the latest chapter. It’s not the end of the story.

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Links to all posts in the series to which this post belongs are in the introductory post. 

My last several posts described research relating health insurance to labor market participation. That’s one vector for job lock—health insurance incentivizing entering or staying in the labor force. But there’s another, and more commonly studied, vector for job lock—staying with a particular firm for the coverage it offers, stifling job mobility (aka, affecting job choice or job turnover).

Gruber and Madrian surveyed 18 papers in this area, finding a mixed literature. Six studies found statistically significant results consistent with job lock. Six returned only statistically insignificant results. Results in six other studies were mixed or could not be evaluated.

A principal challenge in the study of the effect of health insurance on job mobility is that it’s difficult to disentangle whether someone has declined to switch jobs because of health insurance or, instead, because of other job-related factors. Confounding arises because some job-related factors (e.g., other benefits) are correlated with the availability of employer-sponsored insurance. If an employee stays at a firm that offers ESI, is that because he prefers the other benefits of working at that firm? Or because of the ESI? How could you tell?

The identification strategy pursued in almost all of the other analyses of job turnover has been to compare the probability of job departure or turnover of otherwise observationally equivalent employees who differ only in the value that they are likely to place on a current employer’s health insurance policy. Various measures of the value of health insurance have been used. These include: [1] Health insurance coverage from a source other than one’s current employer, most often through a spouse or some sort of continuation coverage such as COBRA; [2] Family size; [3] Health conditions; [4] Health status. [References to papers employing each of these measures omitted.]

These approaches have their strengths, but no study is ideal; the authors discuss various limitations of work in this area (omitted here for brevity). However, one 1994 paper by the two authors is singled out as particularly strong because it “uses a completely exogenous source of non-own-employment based health insurance.” The study exploited variations in state laws that mandated continued access to employer-provided health insurance for the non-employed (state laws akin to COBRA). They found that continuation coverage increased turnover by 10% and interpret it as a lower bound because the high cost of continuation coverage policies make it unlikely that the state laws fully alleviated job lock.

Gruber and Madrian summarize the disparate findings in this area by using them to bracket the likely size of job lock. Their own work based on continuation coverage policies provides a lower bound, while work based on spousal insurance coverage provides an upper bound.

Our view is that the approach of using alternative sources of insurance is more credible. Both approaches suffer from potential endogeneity problems, but the health/expected expenditures approach has a host of additional difficulties that do not arise with the alternative insurance approach. Moreover, within this alternative insurance approach the research by Gruber and Madrian (1994) provides an estimate which is likely free of endogeneity bias, by using variation in state and federal continuation of coverage mandates. So a conservative approach to reading this literature would be to take the results of Gruber and Madrian (1994) identified from continuation of coverage laws as providing as lower bound 10% estimate of the magnitude of job-lock, and the results from the spousal insurance approach as providing an upper bound estimate of 25-35% (Madrian, 1994b; Buchmueller and Valletta, 1996). [Links added.]

GAO (2011) reviewed studies from 2001-2011 and found most consistent with job lock including Adams (2004) and Gilleskie et al. (2002). The former found that among 25-55 year old, married men, ESI reduces job mobility by 22.5% for those without alternative coverage. The latter, that among 24-35 year old, married males, ESI reduces job mobility by 10-15%.

Despite their potential methodological weaknesses, many (though a minority) of studies of the effect of health insurance on job mobility did not find consistent, statistically significant results indicating job lock. If one was motivated to argue against job lock, this is where one should look, though it requires willfully ignoring the majority of studies that do find a statistically significant job lock effect. Of course, it’s important to keep in mind that the effect of health insurance on job mobility is only one kind of job lock. It tells you nothing about its effect on labor force participation, covered earlier in the series.

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Links to all posts in the series to which this post belongs are in the introductory post. 

Older adults aren’t the only ones considering health insurance options when making labor force participation decisions. Younger adults do so as well. And, it should not be terribly surprising that spouses’ access to coverage can affect those decisions too. A wife or husband may be less likely to work or work less if her or his spouse has secured coverage for the family. And an unhealthy worker who has a greater relative need for coverage than a healthy worker may be more likely to work if her retention of health benefits depends on it.

Gruber and Madrian found seven studies of the labor force participation of “prime-aged workers who are not single mothers.”* All seven reported statistically significant evidence consistent with the notion that employer-sponsored insurance (ESI) affects labor force participation decisions among married couples and results consistent with job lock for men.

Four studies—Buchmueller and Valleta (1999), Olson (1998), Schone and Vistnes (1997), and Wellington and Cobb-Clark (2000)—examined the labor force participation of married women. As Gruber and Madrian explain, they all found “strong evidence that the employment and hours decisions of married women do in fact depend on whether or not health insurance is available through a spouse’s employment.”  GAO (2011) reviewed studies from 2001-2011 and found many consistent with job lock. Kapinos (2009) and Murasko (2008), for example, both found that married women worked less if they had coverage through their spouses. And Royalty and Abraham (2006) found that workers with spousal coverage were less likely to work full-time.

One might be concerned, however, that a married man may be more likely to work and obtain employer-sponsored insurance (ESI) if his spouse has a distaste for market work. In other words, causality could run the other way. Gruber and Madrian read the evidence to suggest that this is unlikely.

First, Buchmueller and Valletta (1999) find that the effect of husbands’ health insurance on wives’ labor supply is strongest in larger families, which is consistent with the notion that it is the value of health insurance that is driving the results and not simply tastes for market work. Second, Buchmueller and Valletta (1999) find that wives employed in jobs without health insurance work longer, rather than shorter hours, if their husbands have health insurance. In addition, Olson (1998) shows that conditional on working at least 40 hours per week, wives have a very similar distribution of hours regardless of whether or not their husbands have health insurance. Finally, both Buchmueller and Valletta (1999) and Olson (1998) find that husband’s health insurance reduces the probability of full-time employment for their wives quite substantially, but has only small effects on the probability of part-time employment. These findings taken together provide support for a causal explanation for the effect of husbands health insurance on the labor force participation of their wives, rather than a story based on unobserved correlations with tastes for market work.

Of course, the conclusion that married women are less likely to work if their spouse has ESI coverage doesn’t say much about job lock. Such women are not in any sense “locked” into work. More broadly, however, the studies lend support for the intuition that the presence of health coverage affects the labor market.

Those labor-market effects can manifest in job lock for prime-aged men, especially for those who have spouses or dependents who rely on that coverage  Two studies have examined the effect of health insurance on the labor force participation of prime-aged men—Wellington and Cobb-Clark (2000) (mentioned above) and Gruber and Madrian (1997). They include the following statistically significant results:

• Among 25-54 year old men, continuation coverage (i.e., COBRA) increases the probability of exiting and the time out of the labor force by 15%.
• Among working-age, married women, spousal health insurance reduces labor force participation by 6-12 percentage points, increases part time work by 1.6-3 percentage points, decreases full time work by 7-13.8 percentage points, and reduces hours worked per week by 15-36%.
• Among married couples with both partners 24-62 years old, spousal health insurance reduces labor force participation by 23% for women and between 4-10% for men. It reduces annual hours worked between 8-17% for women and 4% for white men.

More recent work by has focused on the effect of health shocks on employment for workers with and without ESI coverage Bradley et al. (2007) examined breast cancer-diagnosed, married women in Detroit. Those with ESI were ten percentage points more likely to remain with their jobs six months after diagnosis than those with coverage from another source; after 18 months, they were 17 percentage points more likely to stay in their jobs. Tunceli et al. (2009) examined cancer survivors 2-6 years after diagnosis, compared to a non-cancer sample. Those with ESI had a higher employment rate after diagnosis, compared to those with another source of coverage or no coverage. Bradley, Neumark, and Barkowski (2013) found evidence that women with own-job ESI reduce their labor supply by 8 to 11% less after a diagnosis of breast cancer compared to women less dependent on own-job ESI for coverage. All these results are consistent with job lock.

* Single mothers are covered separately, usually in the context of “welfare lock.”

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Links to all posts in the series to which this post belongs are in the introductory post. 

Theory tells us that job lock can affect labor force participation, but not its extent. For that we need evidence.

It’s natural to hypothesize that job lock might be more pronounced for older workers who might otherwise consider retirement. Medical issues and costs increase with age, making employer-sponsored insurance (ESI) more valuable to, say, a 60 year old than, say, a 30 year old, on average. Poorer health at an older age makes working more difficult and retirement more attractive. However, before the age of Medicare eligibility, ESI generally provides the best route to affordable coverage.*

Even after the age of Medicare eligibility, the existence of more generous ESI could influence participation in the workforce. Consequently, workers who might prefer retirement might continue to work exclusively for ESI benefits. That’s a form of job lock. A corollary is that offers of employer-sponsored retiree health insurance (RHI) might reduce job lock. Older workers not yet eligible for Medicare but who place high value on health insurance might be more likely to retire early if they can do so and still be covered by RHI.

Gruber and Madrian found 16 papers on the effect of health insurance on retirement. The studies considered one or several of the situations described above. Based on them, Gruber and Madrian concluded,

Despite using a variety of estimation techniques and several different types of datasets, almost every examination of the topic has found an economically and statistically significant impact of health insurance on retirement.

Indeed, of the 16 papers surveyed, 12 found a statistically significant result consistent with job lock, one found a statistically significant result inconsistent with job lock, and the three others included results that were mixed or that could not be evaluated. In summary, findings consistent with job lock include:

• RHI delays retirement until age of eligibility for it and accelerates retirement thereafter.
• RHI reduces the age of retirement by 3.9-18 months, depending on data source.
• RHI increases the probability of retirement before age 65 by 4.3-15 percentage points, depending on data source.
• RHI decreases the probability of working past age 62 by 5.3%.
• Medicare increases the probability of retirement by 280%.
• Each year of continuation coverage (i.e., COBRA) increases retirement hazard by 30 percent, increases probability of self-reported retirement by 5.4%, and increases probability of not being in the labor force by 2.8%.
• EHI increases the probability of working past age 65 by 5.3%
• Poor health increases probability of retirement by 88% and decreases full time work by 5.1-6.3%, depending on age.
• Private health insurance, RHI, and Medicaid decrease full-time work by 12-25%, depending on age.
• A 10% decrease in the cost of health insurance in retirement increases retirement hazard by 1.1-1.4% for men and 1.4-1.9% for women.
• The reduction in retirement health insurance cost associated with RHI increases retirement hazard by 25% for men and 28% for women.

(The 2011 survey of the literature by GAO found six more studies all consistent with these results.)

That’s a lot of results, and some cover a wide range of effect sizes. A formal meta-analysis would be handy, but none has been done and one is beyond the scope of this series. It’s worth mentioning, however, that all studies have limitations. Gruber and Madrian discuss some potential pitfalls. For example,

Many companies have pension plans that encourage retirement at ages before individuals are eligible for Medicare. These companies, however, are also more likely to offer retiree health insurance benefits. Thus, the pension-related incentives for early retirement are correlated with the health insurance incentives for early retirement. […] If pension-related early retirement incentives are positively correlated with retiree health insurance provision, it is likely that [] reduced form estimates of the effect of retiree health insurance on retirement are too large. Similarly, the selection of individuals with strong preferences for leisure into jobs that offer retiree health insurance will also lead to an upward bias in the reduced form estimates of the effect of retiree health insurance on retirement.

This critique applies to studies by Madrian (1994), Karoly and Rogowski (1994), Headen, Clark and Ghent (1997) [unpublished], Hurd and McGarry (1996) [also unpublished], and  Rogowki and Karoly (2000). Some, though not all, of the mid-range and higher estimates listed above are from these studies.

Before concluding, it’s worth mentioning that delaying retirement due to ESI is, from one point of view, not different from delaying it due to wages. That is, ESI, like wages, is a form of compensation. People like working for compensation, and would otherwise—wait for it—not work. The difference in the case of insurance is that, in principle, people could demand additional wages instead of ESI and then buy individual-market coverage. Were that practical, one could divorce labor market participation decisions from health insurance. In practice, that’s very hard for some older workers given the per-ACA dysfunctions of the individual-market. It’s on this very margin that “job lock” is meaningful with respect to labor force participation. That is, we want to know to what extent people continue working because that’s the only practical way to obtain coverage, not for the compensation effects of ESI. It’s not immediately clear to me to what extent this distinction is made in the literature.

So far, I have considered the effect of health insurance on retirement decisions. Another strand of the literature addresses the effect of health insurance on the pre-retirement labor supply of married couples, which I consider in the next post.

* Here and throughout, we’re considering a pre-ACA world unless otherwise specified. In a future post, we will consider how the ACA changes the landscape.

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Links to all posts in the series to which this post belongs are in the introductory post. 

As Austin observed last week, job lock wouldn’t be a problem in perfectly efficient labor and health insurance markets. But these markets don’t work as smoothly as they might, in part because the law prevents them from doing so.

The single most important contributor to job lock is section 105 of the tax code, which excludes the premiums that an employer pays on an employee’s behalf from the employee’s income. By itself, the unavailability of the tax exclusion for retired workers and some of the self-employed discourages workers from quitting.

In recognition of this concern, Congress in 1986 allowed employees who leave their jobs to retain their coverage at the group rate for up to 18 months. Such “COBRA coverage” gives employees some financial security when they need to find a new job. It also helps that an employer’s COBRA contributions are excluded from its former employee’s income. But COBRA coverage is temporary and it can be difficult to cover COBRA premiums without an income. At best, it’s a partial solution.

A number of federal non-discrimination laws also affect job lock. These laws either discourage or prevent employers from discriminating against low-wage workers, the sick, the disabled, and the elderly. Taken together, they make it easier for workers with higher-than-average medical expenses to secure coverage on relatively generous terms.

This has a mixed effect on job lock. Prior to the ACA, such generous coverage was unlikely to be available on the individual market, where experience rating and preexisting-condition exclusions were the norm. The non-discrimination laws thus exacerbated job lock when it comes to the choice to retire (at least for workers under the age of 65). They also discouraged workers from taking jobs that didn’t offer health coverage—often jobs at smaller firms.

At the same time, however, the non-discrimination laws make it easier for workers with large anticipated health costs to switch employers and retain affordable coverage. That should ease job lock for switchers.

Low-wage workers. To take advantage of the tax exclusion, employers can’t extend health coverage to upper management while withdrawing it from line workers. The exclusion is only available when employers don’t discriminate “in favor of highly compensated individuals” in setting eligibility rules or the prices that employees pay for their health plans. Enacted in 1980, this nondiscrimination rule originally applied only to self-insured firms. Under the ACA, it now applies to all employers—or will, once the IRS finally issues rules to implement it.

The regulations governing the “highly compensated individual” prohibition are make-your-head-hurt complicated. But the basics are easy enough to grasp. In general, a plan has got to satisfy the “percentage test,” under which a plan qualifies for the exclusion if (1) 70% of all employees have actually signed up for the plan or (2) 80% of the employees who are eligible for the plan have enrolled and at least 70% of all employees are eligible to sign up. The tax code thus encourages employers to offer the same health plans, at the same prices, to most of their workers—even those workers who are relatively expensive to cover.

The sick. HIPAA offers additional protection to sick workers in flat-out prohibiting employers from crafting eligibility rules or raising a worker’s premiums based on “health status-related factors.” HIPAA also makes it harder for employers to decline to cover preexisting conditions. (The ACA prohibits the practice outright.) Under HIPAA, employers can exclude most preexisting conditions from coverage for up to a year. After that year is up, however, exclusions aren’t permitted. In addition, workers who have had employer-sponsored coverage for a preexisting condition for more than a year are, if they switch jobs and have a gap in employment of less than two months, entitled to immediate coverage of that condition at the new job.

The disabled. The Americans with Disabilities Act (ADA) forbids employers from discriminating against a job applicant with a disability, unless that disability would, even with reasonable accommodations, impair his ability to do the job. The term “disability” is defined broadly to include “a physical or mental impairment that substantially limits one or more major life activities.” Many workers with chronic illnesses would qualify. Refusing to hire them would contravene the statute. So too would charging them more for a health plan.

The elderly. The Age Discrimination in Employment Act (ADEA) prohibits making hiring decisions based on age. The ADEA also limits the extent to which employers can charge their older workers for the health plans. Under federal regulations, older employees can’t be “required to bear a greater proportion of the total premium cost (employer-paid and employee-paid) than the younger employee.” So if a health plan for a 60-year-old costs the employer a total of $12,000 and a comparable plan for a 25-year-old costs $4,000, an employer could ask his 60-year-old employees to contribute $3,000 and his younger employees to contribute just $1,000. Because both are still paying 25% of the costs of their health plans, those differential costs wouldn’t count as discrimination.

On the whole, these four nondiscrimination laws ease job lock for those looking to switch jobs and, together with the tax exclusion, make employer-sponsored coverage a sweet deal when compared to the pre-ACA individual market. By the same token, the laws exacerbate job lock for those looking to leave the labor market, to take a job at a firm that doesn’t offer health coverage, or to strike out on their own. The ACA, of course, aims to reduce that kind of job lock—but more on that later in the series.

@nicholas_bagley

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Links to all posts in the series to which this post belongs are in the introductory post. 

On what basis does one have a reason to believe job lock exists? As Gruber and Madrian wrote,

The very notion that health insurance is responsible for imperfections in the functioning of the U.S. labor market is somewhat curious. After all, health insurance is a voluntarily provided form of employee compensation. There is little discussion of the distortions to the labor market from cash wages. Why is health insurance different?

As Gruber and Madrian show, in a perfectly competitive labor market in which employers can select which workers to whom they offer health insurance, employer-sponsored health insurance (ESI) does not impose any distortions on job mobility. Any firm wishing to hire a given worker either must offer that worker insurance or offer wages increased by precisely the cost of coverage for that specific worker. Since, in this simple model, employers can freely choose to whom they offer coverage, if an individual wishes to change jobs, she simply asks her new employer for health insurance—if she wants it—or the equivalent in wages of the cost of her coverage—if she prefers that. Since the cost is the same, it makes no difference to the employer.

Perhaps you can already identify some of the ways in which the real world deviates from this simplified model. Gruber and Madrian run through them. First, for all practical purposes employers are constrained in their ability to offer health insurance to some workers and not others. For one thing, according to Gruber and Madrian, the IRS will not grant favorable tax treatment of ESI unless “most workers are offered an equivalent benefits package.” (More about this and other legal constraints in a future post in the series.) For another, it would be prohibitively costly for firms to assess the precise cost of coverage for each worker.

Second, the labor market is not perfectly competitive. Firms face different prices for labor in part because they face different prices of coverage. In particular, large firms can obtain coverage more cheaply than small firms for several reasons (fixed administrative costs, lower risk due to the pooling of greater numbers of individuals). A consequence is that workers cannot obtain the same benefits across jobs, and they will attempt to match their preferences with employers that can accommodate them, a precondition for job lock.

Gruber and Madrian consider a situation in which a worker holding a job at firm A, which offers health insurance that the worker finds valuable. Assume that the worker would be more productively employed at firm B. However, insurance costs at firm B are much higher than at A, perhaps because it is a smaller business. As a result, firm B doesn’t offer coverage. Even if it would like to hire the worker, firm B can’t just offer coverage to him alone, for reasons discussed above. Unless firm B can offer a wage such that the worker can purchase insurance on his own and still be as well off as the combination of wages and insurance from firm A, the worker will not switch jobs.

Gruber and Madrian then raise an interesting possibility. Firm A, knowing that the worker values insurance and won’t switch to firm B on that basis, could reduce the worker’s wages. However, there has been no study to suggest that such worker-specific wage adjustment according to preference for insurance occurs. Moreover, it would probably be administratively difficult to administer such fine-tuned compensation packages. If we assume that firms rarely engaged in such fine-tuning of wages, then the forgoing provides a theoretical reason to expect job lock, at least with regard to job mobility.

But what about labor force participation?

Although we have framed the preceding discussion around the specific issue of job mobility, the same model developed above can be applied to labor supply decisions as well. In this case, the choice for the worker is not between one job and another, but between employment and nonemployment, where the health insurance availability across these two states may possibly differ. For example, consider an older worker thinking about whether to retire. Even if his value of leisure is greater than his marginal product of labor, a less healthy older worker may be unwilling to retire from a job that offers health insurance if health insurance when not employed is either not available or prohibitively expensive. This is a form of “lock.”

Gruber and Madrian go on to discuss theoretical considerations pertaining to “welfare lock” (that potential workers may not enter the labor force in order to maintain means-tested welfare benefits) and job lock within the context of a secondary worker (e.g., with a spouse who may be the source of health insurance coverage). These are not that different from what has been discussed above. So, for brevity, I will omit them.

So, the theory seems fairly clear that job lock can occur. The question is, is there evidence in support of that theory? That’s the subject of subsequent posts in this series, the next of which will be on Monday.

@afrakt

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