Forum for Health Economics & Policy

Volume 12, Issue 2 2009 Article 3

(H EALTH E CONOMICS )

Health Insurance Demand and the Generosity of Benets: Fixed Effects Estimates of the Price Elasticity
Paul D. Jacobs

Congressional Budget Ofce, pauldjacobs@gmail.com

Copyright c 2009 The Berkeley Electronic Press. All rights reserved.

Health Insurance Demand and the Generosity of Benets: Fixed Effects Estimates of the Price Elasticity
Paul D. Jacobs

Abstract
This paper explores a central question in health economics: How sensitive is worker demand for health insurance? After controlling for variables omitted in other analyses, such as the generosity of plan coverage and aspects of worker demand that are constant within rms over time, I estimate a price elasticity (between -0.014 and -0.017) which is smaller than previous estimates. The analysis also nds that employees are more likely to take-up policies with greater insurance protection from hospital expenses, but not for increased coverage for prescription drug or provider ofce visit expenses. Taken together, increases in worker-paid premiums explain about 60 percent of the fall in take-up of employer policies over time, whereas increases in insurance cost-sharing explain about 10 percent of that change. Changes in employer contributions for health insurance had a limited effect on take-up compared with the amounts employees paid out-of-pocket for premiums. An implication of these ndings is that policies which attempt to subsidize employee-paid portions of the premium would be an expensive and potentially ineffective strategy for achieving greater coverage, particularly if the quality of that coverage is not perceived as worthwhile. KEYWORDS: insurance demand, coverage, take-up, out-of-pocket premiums, cost-sharing, measurement error, xed effects, actuarial value

As my dissertation committee chair, Thomas Hertz generously provided support and econometric expertise throughout the development of this paper. Jonathan Gruber, also a member of my committee, contributed valuable insights for which I am very grateful. This paper was based on data from the Kaiser Family Foundation, which I thank for allowing access to several years of their Employer Health Benets Survey. Gary Claxton and Bianca DiJulio in the Health Care Marketplace Project of the Foundation were helpful and encouraging colleagues who taught me a great deal about the survey. Finally, I owe an incredible debt to Martha Heberlein for reviewing numerous earlier drafts of this paper. The analysis and views expressed in this paper are those of the author alone and should not be interpreted as those of the Congressional Budget Ofce.

Jacobs: Health Insurance Demand and the Generosity of Benefits

1.

Introduction

Employer-sponsored health insurance is the predominant source of health insurance coverage in the United States. In 2001, 81 percent of workers were covered by an employer or union plan, but by 2005 this figure had fallen to 77 percent. Increasingly restrictive employee eligibility requirements and a rollback in the number of employers who offered health insurance precipitated most of this decline. However, a quarter of the fall a decrease in coverage of about one percent of all employees in the United States can be attributed to an increasing number of employees who refused employer offers of insurance (Clemans-Cope and Garrett, 2006). One explanation of this trend may be the increasing cost of employer health insurance: a recent study of Californians showed that 62 percent of all uninsured workers who were offered insurance by their employers perceived the cost of their employers offers to be unaffordable (Brown et al., 2007). This paper measures the sensitivity of workers to changes in their out-ofpocket (OOP) and employer-paid premiums by calculating the effect of these changes on employee take-up of health insurance. One innovation of this paper is the extent to which some of the decline in coverage can be attributed to simultaneous changes in the actuarial value (referred to below as plan benefit generosity) of health insurance offers by employers. Insurance products are designed to protect the insured from the risk of uncertain losses. When the costs for accessing health services increase (e.g. increasing deductibles or copayments for services), the plans coverage for a given set of health services is less valuable, and therefore individuals may be less willing to take up coverage. Since employers may change the required OOP contribution to participate in insurance coverage at the same time that the generosity of that coverage changes, price elasticity estimates that ignore generosity may be biased. Another innovation of this paper is methodological: I estimate a price elasticity using two econometric techniques that are uncommon in the previous health insurance demand literature: 1) by using firm-level fixed effects I address the issue of omitted variables bias; and 2) by adding a measurement error correction, I reduce the effect of such errors, which are exacerbated when using fixed effects. Thus, this paper addresses the attenuation bias due to measurement error that is likely prevalent in previous estimates, while additionally controlling for aspects of worker demand that are often unobserved in firm-level data such as socio-economic characteristics (e.g., their gender, age, or educational attainment), and availability of non-firm sources of coverage (i.e. coverage through a spouse or through public insurance programs). Economists and policymakers are interested in the extent to which workers refuse offers of employer health insurance because of costs. After deriving new
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estimates of this price elasticity, I relate them to health policies for increasing coverage. Accurate estimates of sensitivities to price and benefit generosity are useful for designing subsidy schedules and benefits packages for plans proposed in federal or state health insurance expansions. Section 2 reviews some of the previous research on the price elasticity of health insurance. Sections 3 and 4 discuss the dataset and the empirical model. Section 5 presents results and discusses their sensitivity to measurement error. Section 6 concludes.

2.

Previous Estimates

Demand elasticity estimates are a popular topic in empirical health economics research. Elasticity coefficients are commonly estimated as the response of worker take-up to changes in premiums. Take-up is typically defined as a binary variable at the individual level indicating whether the employee accepts an offer of employer insurance, or at the firm level as a continuous variable denoting the proportion of workers who enroll in an employers health plan among those eligible for such coverage. Prior estimates of the price elasticity of employer-sponsored coverage mostly find significant, albeit small, responses of take-up to OOP premium costs, but may be subject to omitted variables bias.1 Because most surveys collect either firm-level or household-level data, but not both, the possibility of bias often exists when factors relevant to a workers decision to accept firm-based coverage are not included as controls. Examples of such omitted variables in firm-level surveys include the composition and characteristics of the workforce and the insurance coverage options available to workers from non-employer sources. If these factors are correlated with total premiums or the portion of the premium employers decide to charge for coverage (the direct price workers face to take up coverage), but omitted in the specification, then elasticity estimates are necessarily biased. The most relevant study of the price elasticity of employer-sponsored health insurance was an analysis of firm-level take-up data by Cutler (2003), which also used the Kaiser Family Foundation/Health Research and Educational Trusts (KFF/HRET) Annual Survey of Employer Health Benefits (EHBS). Cutlers results suggested employees mostly respond to out-of-pocket premium costs, but he also found a significant effect for the full value of the policys premium (the employer plus employee shares). The elasticities of take-up with
1. Such a small price response can still help to explain a large proportion of the reduction in take-up, since health premium growth consistently exceeds inflation and other price indicators. Health insurance premiums have increased a cumulative of 78 percent from 2001 to 2007 (Kaiser Family Foundation/Health Research and Education Trust, 2007).
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Jacobs: Health Insurance Demand and the Generosity of Benefits

respect to premiums implied by his results range from -0.03 using ordinarily least squares (OLS) to a preferred estimate of -0.09 using an instrumental variables approach. To assuage the concern that omitted variables associated with worker characteristics may bias the OOP premium coefficient, Cutler argued that this coefficient was stable after adding several firm-level controls. This argument does not fully address the bias because there may be additional factors which influence take-up that are related to both worker preferences for insurance and how employers set OOP premium rates, and which do not appear in Cutlers estimates. To address this potential endogeneity, Cutler also used state variation in marginal tax rates as an instrument for health insurance premiums. However, this approach has been criticized because higher state income tax rates may encourage firms to offer health benefits and thus would be related to worker demand for insurance. Other estimates of take-up elasticities have also found a weak sensitivity to premiums among workers. An implication of such studies is that subsidies to the costs of employer health insurance may not substantially increase the number of persons covered. One set of estimates by Chernew et al. (1997) ranged from -0.033 to -0.095 depending on the portion of the demand curve along which the elasticity was estimated. Similarly, using a household survey linked with information on premium costs and plan offerings by employers, Blumberg et al. (2001) found that out-of-pocket premiums were more significant than total premiums, but overall the elasticity was also small (-0.04). Gruber and Washington (2005) used a unique natural experimental where OOP premiums changed several times for federal employees over the course of several years, and found a small price elasticity (-0.02), and a high degree of substitution between plans offered by the same employer when plan prices increased.

3.

Data

Six years of the EHBS surveys from 2001 to 2006 were pooled to form the data for this analysis. These surveys focus on employer and employee characteristics, plan eligibility and participation, premiums and premium sharing between employees and employers, and the cost-sharing and benefits of employer sponsored plans. Each year the sample is randomly drawn from Dun & Bradstreet Corporations list of private and public employers which have three or more workers. The survey is stratified to produce sufficient samples for specific industry and firm size categories. Survey weights are constructed to match industry and firm size totals reported by the U.S. Census Bureaus Statistics of U.S. Businesses. Because the Dun & Bradstreet list is extensive and regularly updated and the EHBS sample is randomly selected, the survey is effectively

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representative of the distribution of U.S. businesses in the United States in a particular year. Depending on the year, the response rate for the EHBS surveys used for this paper ranged between 48 and 50 percent. A firm was included in the panel dataset constructed for this paper if the firm was interviewed in more than one year of the six EHBS cross-sections, forming a final sample of 8,752 firm-year observations from 2,426 firms (an average of 3.6 observations per firm). Firms are eligible for the panel portion of each years EHBS if they have 10 or more employees and if they completed one of the last two prior years EHBS surveys. Survey weights were not used in the regressions below. If a coefficient is relatively stable across population units, and a single coefficient is of interest, researchers are usually advised to ignore sampling weights, which is the case in this analysis.2 However, while the EHBS is designed to be nationally representative, there are reasons to believe that the panel of firms used in this analysis is not truly representative. Only firms with 10 or more employees form the panel portion of the survey. In addition, a firms decision about whether to participate in the survey may be related to characteristics associated with their employees demand for health insurance. To address this concern, a re-weighting method was performed to adjust regression coefficients for possible attrition bias. This correction yielded nearly identical estimates to those derived without correcting for this possible source of bias, indicating that the results below are not significantly different from those that would be obtained using the nationally representative sample.3 To further gauge the representativeness of the dataset used in this paper, I also compared the distribution of workers by industry and firm size with Bureau of Labor Statistics data from the Current Population Survey (2007). For most industry categories (transportation/utilities, manufacturing, wholesale/retail, financial, and services) the differences were small and not usually greater than a few percentage points. The distribution of firm size was also very similar; the only difference being the percentage of firms with more than 1000 workers (the EHBS sample used in this paper shows 54 percent versus about 48 percent in the Current Population Survey).
2. In the fixed effects results, interaction terms between premium levels and firm characteristics were insignificant, partially justifying the assumption of a homogenous elasticity across observations. (Deaton, 1997) Further, the elasticities implied by regressions with and without survey weights were not statistically different. 3. The correction factor is the ratio of the predicted probability of attrition constructed from the independent covariate of interest (in this case the OOP premium variable discussed below) to the predicted probability of attrition given that covariate as well as one or more regressors thought to predict attrition but excluded from the original equation. The choice of exclusion may result from choice of specification, or for example, if variables would be endogenous if included (Fitzgerald et al., 1998; Hertz, 2007).
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Jacobs: Health Insurance Demand and the Generosity of Benefits

For most of the survey years used, the EHBS collects information on up to four plans, one for each type in each firm: conventional, preferred provider organization (PPO), health maintenance organization (HMO), and point-ofservice (POS) plans.4 This unique structure enables analyses of the characteristics of and enrollment in each plan type. However, to derive unique estimates for certain key variables, EHBS statisticians have devised firm-level workerweighted averages of the plan types offered in each firm. To test the effect on take-up of OOP and total premiums, two of these variables are used below: 1) the weighted-average of the monthly OOP premium (WAOOP) for single person coverage; and 2) the weighted-average of the total monthly premium for single coverage (WAPR), where the weight for both is the percentage of workers enrolled in each plan type (HMO, PPO, POS, etc.).5 Most of the results discussed below use the OOP premium values for single person coverage rather than for family coverage. In practice, both may affect a workers decision to take up coverage, and thus the results for family premiums are also discussed below. Table 1 shows summary statistics for the variables used for both the pooled cross-sectional OLS and fixed effects regressions. The summary statistics for the cross-sectional data are weighted by the number of employees. For the cross-sectional regressions, categorical variables are used to capture the effect of region (West, Midwest, and South compared with the Northeast), industry (compared with Government (not shown)), firm size (Medium: 51-300 workers, Large: 301-1000 workers, Very Large: 1001-5000 workers, and Jumbo: 5001+ workers compared with Small firms with between 10 and 50 workers) and abilityto-pay (firms that have less than 10 percent low-earnings workers or 10-25 percent low-earnings workers compared with firms that have more than 25 percent low-earnings workers).6 Firm size is included because it is negatively related to the size of the loading factor employers face, i.e., the costs of coverage in excess of the cost of benefits. (The significance of unionization on take-up was also tested, but only for the years 2002 through 2006 since union status was not included in the 2001 survey.) In the fixed effects regressions, I use continuous time-varying variables (number of employees and its value squared and percentage of low-earnings workers and its value squared) to capture the withinfirm variation for these controls (lower panel of table 1).
4. The EHBS also collects information on high-deductible health plans, but their emergence in recent years means that a six-year comparison of such information could not be made. 5. An alternative approach, using the plan type with the lowest monthly OOP premium for single coverage (MINOOP), is also discussed below although resulting estimates were nearly identical. The minimum premium among plans offered is a potentially good predictor of take-up because, for workers deciding whether to take up employer insurance, an alternative source of coverage, or go uninsured, the lowest-priced plan is likely to be an important alternative. 6. The low-earnings category is defined as a workers making less than $20,000 a year.
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Table 1. Summary Statistics for Cross-sectional OLS and Fixed Effects Equations, KFF/HRET, EHBS, 2001-2006 Summary statistics for OLS equations (worker weighted) Variable Obs. Mean Std. dev. Min Max Take-up (dependent variable) 8749 0.88 0.13 0 1 c MINOOP (per month) 8749 37.74 39.53 0 c WAOOP single (per month) 8749 43.37 40.97 0 c WAOOP family (per month) 8728 203.06 151.86 0 c WAPR (per month) 8749 291.63 89.21 50 <10% low-earnings 8749 0.44 0.50 0 1 10-25% low-earnings 8749 0.33 0.47 0 1 Uniona 7479 0.40 0.49 0 1 Manufacturing 8749 0.16 0.37 0 1 Mining/construction 8749 0.03 0.18 0 1 Transportation/utilities 8749 0.08 0.28 0 1 Wholesale 8749 0.05 0.22 0 1 Retail 8749 0.08 0.26 0 1 Financial 8749 0.08 0.27 0 1 Service 8749 0.28 0.45 0 1 Government 8749 0.15 0.36 0 1 Healthcare 8749 0.09 0.29 0 1 Northeast 8749 0.21 0.41 0 1 West 8749 0.20 0.40 0 1 Midwest 8749 0.24 0.43 0 1 South 8749 0.35 0.48 0 1 Small (<=50 workers) 8749 0.14 0.34 0 1 Medium (51-300 workers) 8749 0.17 0.38 0 1 Large (301-1000 workers) 8749 0.13 0.33 0 1 V. large (1001-5000 workers) 8749 0.16 0.36 0 1 Jumbo (>=5001 workers) 8749 0.41 0.49 0 1 % Doctor bill insurer paysb 4317 0.92 0.10 0 1 b % Hospital bill insurer pays 4299 0.97 0.05 0.58 1 % Rx bill insurer paysb 4229 0.89 0.06 0.37 1 Summary statistics unique to fixed effects equations (unweighted) Percent low income 8752 19 21 0 100 Number of employees 8752 4787 16802 10 c Source: KFF/HRET, EHBS, 2001-2006 Notes: a Available from 2002 through 2006. b Available from 2004 through 2006. c Cell not shown to protect confidentiality of largest firm.
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Jacobs: Health Insurance Demand and the Generosity of Benefits

To approximate benefit generosity, the cost-sharing features used in this paper include many of the plan characteristics that determine how much enrollees would pay for medical goods and services, including: deductibles, co-insurance payments and percentages, and out-of-pocket maximum limits (which serve as an upper limit to an individual or familys exposure to medical spending). To approximate generosity using a single measurement, I calculated the percentage of a typical medical bill that the insurer would pay for various categories of medical expenses. Table 1 shows these variables: the percent (%) of the average doctor, hospital, or prescription drug (Rx) bill that the insurer would pay. These proxies for plan generosity were designed to measure the degree of financial protection the plans would provide for a typical medical bill.7 The cost-sharing questions used to construct generosity proxies were consistently available for the 2004 through 2006 surveys. Thus, the analytical results which include insurance generosity as a covariate are reported separately from the 2001 through 2006 results. Because the EHBS collects information on each of several plan types, a generosity measure was constructed for each of the three major plan types (HMO, PPO, and POS). The maximum generosity value among a firms plan types was used to approximate the generosity of coverage for prescription drugs, hospital payments, and office visits for the firm.

4.

Empirical Methods

The analysis below measures health insurance demand elasticity as the percentage change in health plan take-up with respect to a percentage change in the average health insurance premium within a firm. Unlike conventional goods, the price of health insurance coverage can be measured in several ways. The following sections discuss, in order, which price variables are used, the empirical strategy to estimate their effect on take-up of coverage, and adjustments that are made for measurement error in the collection of premium data. 4.1 Which Price?

When measuring the demand elasticity for health insurance, there are several choices for the appropriate measurement of price for an employee purchasing
7. Typical medical expenses were defined as the mean medical expenditures incurred by all individuals with a given type of expenditure in 2004. These values were $779 for physician office visits, $1,037 for prescription drug expenses, and $13,687 for in-patient hospital expenses. These values serve as baselines to compare the cost-sharing features of plans, and they are arbitrary to the extent that one could have chosen any value in excess of most individuals costsharing limits to derive relative variation in the percentages paid by insurance plans (Agency for Healthcare Research and Quality, 2004).
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coverage through his/her employer. Employees may view either the total premium (employee plus employer shares) or rather their own contribution, or some combination of the two, as the relevant price. The primary reasons workers demand health insurance benefits are to reduce their exposure to potential medical costs and to gain access to health care providers. Most firms charge OOP payments for health coverage partly to discourage workers who do not value the benefit from enrolling. (They may also charge different premiums among their plan choices to encourage enrollment in certain plans or to encourage their workers to take up non-employer health benefits, etc.) This paper will test how sensitive workers are to changes in the OOP premiums they must pay to enroll into a health plan. Even when employee OOP premium levels do not change, increases in total premiums could cause lower take-up if workers no longer find coverage worthwhile at that price, and are influenced by the amount their employers pay for premiums. When fringe benefit costs increase, wages typically fall when productivity is held constant, and employees may prefer increases in earnings to increases in benefits. However, increases in total health insurance costs could also cause higher take-up, other factors remaining constant. Higher total premiums often imply the aggregate cost of medical care treatments are increasing, and thus the worker is exposed to greater potential health care costs if they choose not to insure (Cutler, 2003). If workers are risk averse, increasing health care costs (and subsequently higher premiums) may be associated with a higher likelihood to insure. Empirically, nearly all of the studies reviewed above find that the OOP portion of the premium negatively affects the decision to take up, and that the effect of the total or employer portions of the premium is insignificant or weakly positive (e.g., Chernew et al.). The analysis below tests the effect of both prices the OOP portion of the premium paid by workers and the employer portion of the premium. While the sign of the OOP coefficient is expected to be negative or zero, the predicted sign for the total premium, as outlined above, is ambiguous. 4.2 Empirical Model

To accurately measure the effect of price on take-up, this paper accounts for determinants of take-up which have not been addressed in prior studies. Using firm-level fixed effects, this paper controls for the influence of time-invariant demographic characteristics which are often unavailable in firm surveys and without which elasticity estimates would be biased. These factors include the occupation, race/ethnicity, educational level, and gender mix of a firms workforce, which are assumed to be constant over the shorter time periods studied in this paper. Other time-invariant factors controlled for using this technique

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Jacobs: Health Insurance Demand and the Generosity of Benefits

include: managerial policies which might influence worker take-up, as well as factors relating to competition for a firms labor force. To the extent that other factors are relatively constant within a firm over time, this approach also addresses differential worker access to coverage from outside the firm. These may include employer offers of coverage for spouses, or through eligibility for public programs, such as Medicaid, the State Childrens Health Insurance Program (SCHIP), or Medicare, which may bias coefficients, particularly if employers change OOP premiums in response to changes in the availability of these options. Of course, a fixed effects specification is not a panacea for omitted variables bias. While the influence of time invariant factors is removed, other factors may change over time which could be correlated with worker demand for employer health benefits. One such factor is changes in worker or dependent eligibility for Medicaid or SCHIP. Indeed, in response to economic or budgetary pressures, states have adjusted eligibility levels and enrollment procedures during the same years which were used in the analysis for this paper. An employer might also change OOP premiums over time because premiums rose as the health of some workers worsened or as workers aged. Since such trends are also likely to be correlated with worker demand for benefits, price coefficients which use intrafirm heterogeneity would also be biased. While these factors are undoubtedly important, many of them are arguably stable over relatively short time periods, and specifically the short time frames over which most firms are observed in the EHBS. Also, while firms certainly can and probably do react to such changes, they may not be able to do so immediately. Firms usually set their benefit policies once a year, reducing the speed with which they can react to changes in the competitive or policy environments. Further, the average number of years that a firm is followed in the sample used in this paper is 3.6 years which implies that, on average, firms would have had 2 or 3 chances to change benefits in response to changes in the policy or competitive environments. Anecdotal evidence suggests that firms are less willing to make extreme changes to benefits packages over short time periods. This, in combination with the short length of time over which the EHBS panel tracks firms, suggests there is a limited degree to which public coverage eligibility changes or employee turnover could affect a firms decision to change benefits. Furthermore, since most of the variation in the demographic mix and the competitive and state policy environments is likely to be between firms rather than within firms over time, a fixed effects model will improve the elasticity estimate over one from an ordinary least squares model. Recognizing that past research finds the OOP portion of premiums to be the relevant margin, the empirical model begins with this test. Following Cutler, I

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first present a model of take-up for firm-year observations in the panel sample without fixed effects: (1) TUit = 0 + 1WAOOPit + Xit + it

Here TUit is the take-up rate (the percentage of eligible employees in the firm who enroll in any plan offered by the firm) of firm i in time period t, and WAOOPit is the weighted average over the firms plan types of the workers portion of the monthly premium for single coverage, which corresponds most closely to a single firm-level measurement of OOP costs for workers. Included in Xit are controls for the size of the firm, the ability-to-pay of the workforce (measured as the percentage of workers in the firm with earnings below $20,000), indicator variables for the industry and region of the firm, the survey year, and, for a separate estimation on the latter three survey years, the benefit generosity of plans offered. The error term, it, consists of unexplained variation in take-up in the cross-sectional results discussed below. The variables in Xit control for observable differences between and within firms in worker demand for health insurance. However, it will also include demographic and other characteristics of a firms workforce which are likely to be systematically related to the WAOOP variable and, if so, would influence employee demand for insurance. Ordinary least squares estimates of (1) would then be biased. To address this, I first decompose the error term into firm-level characteristics of health insurance demand and a random error term: (2) it = i+ eit

The inclusion of firm-specific intercepts, i, removes firm-level components of worker health insurance demand if (1) is estimated using firm-level fixed effects. Variation in take-up is then estimated from variation in firm-level employee or employer premium costs, and results in an unbiased estimate of the take-up elasticity, where the subscript a variables denote inter-temporal, firm-specific means8: (3) TUit - TUai= 1(WAOOPit - WAOOPai) + (Zit Zai) + (eit eai)

Inter-temporal variation in WAOOP should be exogenous to changes in take-up; the former is mostly caused by the annual growth in medical costs, holding
8. A natural alternative to (3) the random effects estimator was considered, but rejected on the basis of a Hausman test the more consistent fixed effects coefficients were significantly different than the more efficient random effects coefficients. The chi-squared statistic was 584.94 with seven degrees of freedom (p<0.001).
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Jacobs: Health Insurance Demand and the Generosity of Benefits

constant other factors such as the health risk of the covered population and the generosity of benefits. (The Z matrix is analogous to the X matrix in (1), but includes only those variables which vary over time within a firm.) A negative estimate of 1 implies employee take-up is negatively related to monthly OOP costs. A negative estimate of 2, which is used to denote the corresponding coefficient for the full premium (WAPR), implies a negative relationship between take-up and total premiums. A positive estimate of 2 implies that increased health costs may be inducing more individuals to insure. So far, this model improves on past estimates by: 1) using the fixed effects estimator to remove the influence of time-invariant, firm-specific factors; and 2) including benefit generosity differences between firms and over time. If employee preferences for health insurance are negatively correlated with firms chosen levels of out-of-pocket premiums, then prior estimates may be negatively biased. For example, this may occur because employee demand for health insurance is large and either: 1) labor markets are tight, so employers will tend to attract employees with lower OOP payments; 2) employers believe coverage increases productivity and thus want to encourage take-up; 3) employers may wish to be seen as benevolent and/or they recognize the value their employees place in subsidized coverage; or 4) if a firm does not offer a cafeteria plan where employee premiums can be paid with pre-tax dollars, so when marginal tax rates are high, there is more to be gained when employers pay health premiums with pre-tax compensation dollars. (Of course, preferences for insurance and OOP premiums may also be positively correlated if employers raise monthly OOP levels when individuals have relatively high demand for insurance, which could be the case if the converse of one or more of the above statements typically holds and this correlation outweighs the strength of any negative correlation.) It is also not clear whether employers will charge their employees more or less OOP for insurance if they have other, non-firm, health insurance coverage options. If there are better or more numerous coverage options for employees, employers may subsidize more of the premium to encourage greater take-up, or employers may subsidize less of the premium to reduce their costs and/or because employees have a preference for non-firm options. In sum, the omitted variable bias due to missing employee demand characteristics or non-firm coverage options cannot be signed a priori. 4.3 Measurement Error Attenuation

Although OLS regressions may be subject to attenuation bias in parameters due to measurement error in right-hand side variables, the problem is generally compounded in panel settings, when reporting or other errors in measurement are not highly correlated over time (Griliches and Hausman, 1986). In a panel setting

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without a reliability ratio, one method to produce an unbiased estimate is to solve for the vector by combining parameters from the fixed effects and another differenced (e.g., first, second, or third, etc.) estimate (Griliches and Hausman). Another commonly used technique is to find an instrument for the variable that is measured with error (Griliches, 1977). However, if a second measurement of the variable is available, the reliability ratio (denoted ) can be directly estimated (Angrist and Krueger, 1998). This method is employed below to adjust cross-sectional and fixed effects coefficients, using a second, also mismeasured, estimate of the total premium reported by firms. The additional measurement used below is derived from a question in each years EHBS asking respondents to estimate the percentage change in their premiums from the previous year. Using the prior years reported level for the premium, WAPRit-1, and one plus the reported percent change in the premium between periods, gWAPRit, a second estimate of the current years premium (denoted WAPR2it) can be constructed as follows: (4) WAPR2it = (gWAPRit) * WAPRit-1

This additional estimate, in conjunction with the actual reported level of the premium in the current year, can be used to approximate the signal-to-noise ratio of variation in premiums.9 This is done by first assuming all premium levels, WAPRit and WAPRit-1, are measured with mean zero, white noise errors, denoted: t and t-1. Then, after making a few additional assumptions, the correlation between WAPR2it and WAPRit will result in the reliability ratio: (5) = corr(WAPRit + t, gWAPRit*(WAPRit-1 + t-1))

Equation (5) reduces to the reliability ratio the ratio of the true variance in WAPRit to its total variance by employing one of the usual measurement error assumptions (corr(WAPRit, t) is equal to zero), and also by adding the additional assumptions that: 1) the growth rate, gWAPRit is not measured with error, 2) the correlation between growth rates and the error term is zero (corr(gWAPRit * t-1, t) = 0) and; 3) the correlation between premiums and their growth rate is zero (i.e. corr(WAPRit, gWAPRit * t-1) = 0). The first of these additional assumptions is
9. After adjusting the reliability ratio technique for the loss of degrees of freedom in the fixed effects model, this procedure is computationally identical to using the second measurement as an instrument for the first. Practical limitations prevented this latter strategy from being implemented. Namely, the second measurement of the premium was only available as an instrument for particular firm-year observations which had a corresponding lagged premium value. Thus, the instrumental variable results would have only been applicable to a subset of the full sample.
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justified since this model is primarily designed to capture either the effects of measurement error in premiums or measurement error in the changes in premiums over time, so it is redundant to simultaneously treat other estimates as also measured with error. The second is justified on analogous grounds as for the typical measurement error model where the errors are assumed to be white noise terms. The third assumption is justified empirically; the intertemporal correlation between premiums and their growth rates was only 0.019. To construct a reliability ratio for fixed effects estimates, percentage changes in reported premiums (WAPRit - WAPRit-1)/ WAPRit-1 are compared to the reported percentage change between years, gWAPRit. These two estimates of the percentage change in premiums are used to determine the reliability ratio of differenced data in the EHBS, denoted fe. In either the level or difference-frommean cases, can be estimated as the coefficient in a regression where the measurement to be used in the ultimate analysis is an explanatory variable for the measurement which corresponds less-closely (Angrist and Krueger). In this case, the measurements derived from respondent-estimated percentages WAPR2it and gWAPRit are regressed against those derived from reported levels WAPRit and (WAPRit-WAPRit-1)/WAPRit-1, respectively while including all other covariates which belong in the final estimation equation. Estimates of the reliability ratio for WAPR are shown below in Table 2. One assurance of the validity of this approach is that the values in levels and differences are comparable to reliability ratios estimated for data in other surveys (Angrist and Krueger). Since there is no second measurement of WAOOP or MINOOP, the estimates of reliability in Table 2 are used as a proxy for the reliability of OOP premium values. Table 2. Estimates of the Reliability Ratio for Premiums Type of estimate Reliability ratio for WAPR Levels (c) 0.716 Differences (fe) 0.404 Source: KFF/HRET, EHBS, 2001-2006 With the reliability ratios in Table 2 for the OLS and fixed effects models, respectively, the measurement error-corrected estimates were calculated by solving for : (6) = (XX n )-1 (XTU)

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Where the variance-covariance matrix of the measurement error, , times the sample size, n, is subtracted from the error-laden XX matrix, which now includes all covariates for ease of interpretation (Deaton). TU is the take-up vector.

5.

Results

This section presents the results of both the cross-sectional OLS and fixed effects estimates of the health insurance take-up price elasticity. The first part of this section focuses on the results from analyzing the sensitivity of worker take-up to OOP premiums and other covariates. The results are corrected for measurement error, but mention is also made of non-corrected results, which are comparable to results from elsewhere in the literature. The second section focuses on results relating to plan generosity. The third section discusses results for the total premium as well as several regressions which attempt to separate the causal effects of OOP and total premiums. 5.1 OOP Premium Results

Table 3 shows OLS results from estimating the take-up elasticity using six pooled cross-sections (2001 to 2006) of the EHBS without firm-level effects. The OLS model using cross-sectional data allows one to see the effect of a wider range of covariates since firm-specific characteristics that do not change over time can be included. Further, this approach is more efficient than a fixed effects estimate since the EHBS panel is relatively short and unbalanced there are 2,426 firms and 8,752 firm-year observations, implying that between one-third and one-fourth of the degrees of freedom are lost during fixed effects estimation. However, regardless of the greater efficiency of these estimates, they are biased. Thus, fixed effects estimates, presented following the OLS results, are preferred. As Table 3 shows, in the pooled cross-sectional regression, the firm-level take-up of health benefits is negatively related to OOP premiums, as was hypothesized at the start. The cross-sectional estimate of the OOP coefficient is similar (-0.00165 and -0.00172), regardless of whether the weighted-average or minimum OOP plan premium was used as the price measure. These measurement error-corrected values imply that a single dollar increase in monthly OOP premiums may decrease the percentage of workers taking up insurance within a firm by about 0.17 percentage points. Using the population means for take-up and OOP premiums, this coefficient implies an elasticity between -0.08 and -0.09, which is at the higher end of the range of estimates reviewed in the literature. Again, this estimate is subject to potentially large omitted variables bias, and should be treated with appropriate skepticism.

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Table 3. Results from Cross-sectional OLS Regressions, EHBS, 2001-2006 Variable Weighted avg. OOP Coefficient p-value -0.00165 0.000 --0.05259 0.000 0.03561 0.000 0.00953 0.090 0.01085 0.056 0.00796 0.159 0.01850 0.001 0.02232 0.000 0.04634 0.000 0.05853 0.000 Minimum OOP Coefficient p-value ---0.00172 0.000 0.04951 0.000 0.03394 0.000 0.00866 0.124 0.00909 0.109 0.00568 0.314 0.01654 0.004 0.01883 0.002 0.04488 0.000 0.05371 0.000

WAOOP MINOOP <10% Low-earnings 10-25% Low-earnings 2002 2003 2004 2005 2006 Medium (51-300 workers) Large (301-1000 workers) V. large (1001-5000 workers) 0.05606 0.000 0.04814 0.000 Jumbo (>=5001 workers) 0.05437 0.000 0.04159 0.000 Mining/construction -0.04235 0.000 -0.03934 0.000 Manufacturing -0.01608 0.008 -0.01549 0.011 Transportation/utilities -0.00571 0.468 -0.00484 0.538 Wholesale -0.02720 0.001 -0.02642 0.001 Retail -0.09405 0.000 -0.09115 0.000 Financial -0.03495 0.000 -0.03631 0.000 Service -0.06076 0.000 -0.06286 0.000 Healthcare -0.06450 0.000 -0.06434 0.000 Midwest -0.00620 0.174 -0.00288 0.527 South 0.02727 0.000 0.02878 0.000 West -0.00582 0.263 -0.00593 0.255 Constant 0.86499 0.000 0.86781 0.000 R2 0.23 0.23 Observations 8752 8752 Source: KFF/HRET, EHBS, 2001-2006 Notes: Excluded variables are 2001 for year, government for industry, northeast for region, and less than 50 workers (small) for firm size. Coefficients corrected for measurement error in premiums with reliability equal to 0.716. Without correcting for measurement error, the cross-sectional coefficients for OOP, which are comparable to other studies, are -0.00113 and -0.00118
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respectively (not shown in Table 3). These measures imply a corresponding lower elasticity of approximately -0.06, which is equal to the median of the estimates from the literature reviewed for this paper, suggesting measurement error may have attenuated previous estimates. Ability-to-pay is also related to take-up in the cross-sectional estimates reported in Table 3. Compared to firms with more than 25 percent of their workforce making less than $20,000 (relatively less well-paid workers), those with 10 to 25 percent low-earnings workers have greater take-up (about 3 to 4 percentage points) and those with less than 10 percent lower-earnings workers have take-up rates that are, on average, about 5 points higher. Workers with greater earnings are more likely to take up health coverage, perhaps because they can better afford the OOP payments that firms charge, or because higher earnings are correlated with greater wealth or other factors which increase the value of insurance. The interaction term between the percentage of low-earnings workers and the OOP premium was significant (coefficient of -0.000013, p=0.000, not shown). This implies that whereas a $16 per month increase in worker contributions for premiums would cause a 1.4 percentage point decrease in takeup in the average firm, in a firm with 10 percentage points more low-earnings workers, this same increase in cost would cause a 2.3 percentage point decrease. Firm size is also correlated with take-up. Compared with smaller firms (those with less than 50 workers) who may have higher administrative costs, offer less generous benefits or a narrower range of plan choices, large firms have takeup rates that are between 4 and 6 percentage points higher. Take-up rates varied by industry, ranging from approximately equal to those in the government sector (transportation/utilities) to 9 percentage points lower (retail), with other meaningful differences for the healthcare, service, and mining/construction industries. Compared to firms in the Northeast, firms in the South had 3 percentage points higher take-up. Finally, workers in unionized firms took-up coverage 1.6 percentage points more frequently than workers in non-unionized firms (p<0.001), perhaps due to their higher average wages or more attractive benefit options (not shown). The fixed effects estimates, also corrected for measurement error, are reported in Table 4. These coefficients generally have the same signs as those from cross-sectional OLS estimates, but differ in magnitude. For the monthly cost paid by workers for insurance benefits, the coefficient, after adjusting for measurement error, was about -0.0003, regardless of whether the weightedaverage or minimum premium measurements were used. This coefficient implies that for each dollar increase in the worker portion of the monthly premium, only 0.03 percentage points fewer workers took-up. This small coefficient implies a very low elasticity of worker demand for health insurance with respect to OOP premiums: between -0.014 and -0.017, depending upon whether one uses the

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WAOOP or MINOOP premium coefficient. Without correcting for measurement error, the fixed effects coefficient is about a third as large (-0.0001) implying an elasticity between -0.005 and -0.006. Compared with cross-sectional estimates, fixed effects estimates are about five times smaller in absolute value after adjusting for measurement error and controlling for potential omitted aspects of worker demand for insurance. These results suggest that omitted variable bias is indeed a substantial problem in previous cross-sectional OLS estimates of health insurance demand.10 Ability-to-pay, as measured by intra-firm deviations in the percentage of the workforce who earn less than $20,000 and its square, were both significant (Table 4). The combined effect of these variables implies that for firms with 10 percentage points more workers making less than $20,000, they will have take-up rates that are about 0.6 percentage points less. As one would expect, a higher proportion of lower-earnings workers leads to lower take-up of health insurance.11 Table 4 also shows that there is a very small effect on take-up for firms that increased in size over time (the coefficients are too small to be visible given the significant digits shown in Table 4). Every increase of 5,000 employees in a firm leads to a 1 percentage point lower take-up rate. This result may seem counterintuitive for the reason that increasing firm size reduces the per capita cost of insurance, and because of a potential correlation between firm size and demand for health insurance benefits. However, firms whose workforces quickly expand may make some or all of these new employees eligible for insurance, but workers may take weeks or months to enroll in new plans. Further, new employees may have systematically lower demand for coverage than workers already at a job, may have alternative sources of coverage which they prefer to their new firms offer, or newly-hired temporary workers may have less stable relationships with employers and/or lower earnings, all of which would lower take-up rates when firms expand.

10. Because OLS estimates appear negatively biased, it can be inferred that the omitted variable (worker demand for health insurance) is negatively correlated with the OOP premium variable of interest: firms tend to lower OOP premiums when worker demand for health insurance is high. This negative correlation indicates that, in this sample of firms, most lowered OOP costs when demand for health insurance was high. 11. Unlike in the OLS estimates, the interaction between premiums and the percentage of low-earnings workers in a firm was not significant and thus not shown.
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Table 4. Results from Fixed Effects Regressions, EHBS, 2001-2006 Weighted average OOP Variable Coefficient p-value WAOOP -0.00031 0.017 MINOOP --% low-earnings -0.00059 0.020 % low-earnings sq. 0.00001 0.018 Employees (#) 0.00000 0.000 Employees sq. (#) 0.00000 0.001 2002 0.00255 0.542 2003 0.00180 0.690 2004 -0.00576 0.237 2005 -0.00466 0.375 2006 -0.00053 0.927 Constant 0.87453 0.000 2 R 0.01 Observations 8752 Source: KFF/HRET, EHBS, 2001-2006 Note: Coefficients corrected for measurement reliability equal to 0.404. Minimum OOP Coefficient p-value ---0.00029 0.026 -0.00058 0.020 0.00001 0.019 0.00000 0.000 0.00000 0.001 0.00233 0.576 0.00130 0.771 -0.00660 0.167 -0.00562 0.274 -0.00187 0.735 0.87317 0.000 0.01 8752 error in premiums with

The results of this analysis also suggest workers who support families may be very insensitive to the prices they pay to cover their spouses and children, and that changes in take-up of health insurance may be primarily driven by single workers. The OOP family premium was a significant predictor of take-up in the OLS but not the fixed effects regressions (not shown). The measurement errorcorrected OLS and fixed effects coefficients for the family premium were -0.00026 (p=0.000) and -0.00006 (p=0.119), respectively. The fixed effect result for single coverage, which was significant, was more than five times larger than that for family premiums (-0.0003 versus -0.00006). This result is not a consequence of greater noise in the family premium variable; the standard error for the single coverage premium was almost three times that of that for family coverage (0.00011 versus 0.00004). 5.2 Plan Generosity

Table 5 shows OLS and fixed effects estimates of take-up which include benefit generosity variables as controls. Due to the smaller sample size, and the shorter panel (three years as opposed to six), there is a substantial loss in efficiency for

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the fixed effects estimates. Nevertheless, the OLS results in Table 5 show that the generosity of hospital coverage was a significant predictor of higher take-up. The 0.163 coefficient implies that a 10 percentage point increase in the minimum amount that a firms insurance plans would pay for a hospital bill results in a 1.6 percentage point increase in take-up of health insurance. Although insignificant (p=0.102), a 10 percentage point increase in the share of the prescription drug bill the firms plans would pay also is associated with an increase in take-up (0.64 percentage points, derived from a coefficient of 0.064). Table 5. Cross-sectional OLS and Fixed Effects Results, Including and Excluding the Generosity of Doctor, Prescription Drug, and Hospital Coverage, EHBS, 2004-2006 OLS w/ generosity pCoeff. value -0.00105 0.000 Fixed effects w/ generosity pCoeff. value -0.00009 0.276 -0.00038 0.049 0.00000 0.010 w/o generosity pCoeff. value -0.00009 0.275 -0.00037 0.057 0.00000 0.015

Variables WAOOP a % Low-earnings a a a Employees (#) % Doctor bill insurer Pays -0.01295 0.601 -0.03341 0.263 --% Hospital bill insurer Pays 0.16298 0.004 0.13576 0.031 --% Rx bill insurer pays 0.06416 0.102 0.05326 0.235 --2005 0.00727 0.112 -0.00298 0.485 -0.00286 0.501 2006 0.01294 0.006 0.00221 0.635 0.00091 0.842 Constant 0.63687 0.000 0.70787 0.000 0.85580 0.000 2 R 0.20 0.02 0.02 Observations 4192 4192 4192 Source: KFF/HRET, EHBS, 2004-2006 Notes: Squared terms for number and percent low-earnings employees excluded because they were insignificant. Results not corrected for a measurement error. Variable only used in fixed effects regressions. The middle columns of Table 5 show that worker take-up is sensitive to the generosity of coverage that employers offer, and specifically to the percent of hospital expenses covered by a plan. As the fixed effects results show, firms with insurance plans which paid 10 percent more of the cost of hospital expenses had a take-up rate that was 1.4 percentage points higher. (This coefficient is essentially
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identical to the OLS result for the generosity of hospital coverage.) The finding of greater sensitivity to hospital coverage suggests that more generous coverage for larger expenses increases the likelihood of insurance purchase. Although hospital expenses typically occur less frequently than those for prescription drugs or health provider office visits, the evidence in Table 5 suggests worker take up is sensitive to the generosity of hospital coverage, rather than to coverage for less expensive, but more frequent treatments, such as prescriptions or provider visits. Another important question is whether the benefit generosity results change the interpretation of the elasticity coefficients reported in Section 5.1. As the set of fixed effects results in Table 5 show, the coefficient on WAOOP is essentially identical with or without generosity variables. This provides compelling evidence that the absence of plan generosity data does not bias the full-sample elasticity estimate shown above, unless take-up was differentially affected by plan generosity in particular years. 5.3 Employer Premium

Unlike the results for OOP premiums, which confirm the predicted negative relationship between the costs employees pay and their likelihood of taking up health insurance, those derived using the full premium are less consistent. Table 6 shows cross-sectional and fixed effects estimates of coefficients for two combinations of health insurance premium variables: 1) the weighted average total premium, WAPR (employee plus employer portions); and 2) the weightedaverage OOP (WAOOP) and the employer portion of the premium (the difference between WAPR and WAOOP). As found elsewhere in the literature on take-up, the effect of the total premium is statistically insignificant from zero, yet weakly positive (the top left column of Table 6).12 However, as the left column in the bottom panel of Table 6 shows, in the fixed effects equation, WAPRs coefficient is small, only -0.00007, yet negative and statistically significant. The negative sign implies that increases in the total value of the premium may encourage workers to obtain alternative sources of health coverage or to go uninsured. And perhaps as theory asserts, these workers may decline coverage in order to increase their cash earnings because there is a tradeoff between benefits and cash earnings and some may prefer the latter. An alternative explanation, which conforms with the crosssectional result where the effect of total premiums was insignificant, is that increases in the total premium are correlated with increases in the OOP costs
12. Since the reliability ratio for each of these variables was assumed to be approximately equal (0.716 for cross-sectional estimates and 0.404 for changes over time), the estimates are not corrected for measurement error because these adjustments would be identical within each specification.
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workers pay, which subsequently lowers take-up. Indeed, the correlation coefficient between annual changes in both OOP and total premiums is 0.33. Since changes in WAOOP and WAPR are highly correlated, and WAOOP is an omitted variable in the left-hand panels of Table 6, changes in premiums (WAPR) may be affecting take-up primarily through its effect on changes in OOP costs. Table 6. Comparison of OLS and Fixed Effects Estimates Including Total, and Employer and Employee Premiums, EHBS, 2001-2006 Variable Total premium Coefficient p-value 0.651 --Employee and employer premiums Coefficient p-value --0.00165 0.00000 -0.000 0.926 -0.007 0.042

OLS (cross-section) WAPR 0.00002 WAOOP -WAPR-WAOOP --

Fixed Effects WAPR -0.00007 0.015 -WAOOP ---0.00015 WAPR-WAOOP ---0.00006 Source: KFF/HRET, EHBS, 2001-2006 Note: Results are not corrected for measurement error.

To provide an accurate interpretation of the effects of OOP and total premiums independently, I subtracted the worker portion of the premium (WAOOP) from the total premium (WAPR) and used this as a separate predictor of take-up. If the total cost of health insurance premiums truly affects take-up that is, workers perceive and react to both the employee share and the full cost of the premium then the employer-only portion of the premium should also be a relevant cost to workers and a significant predictor of take-up. This effect can be captured by changes in the employer portion of premiums separately from changes in the amount workers pay out-of-pocket. As the right column of Table 6 shows, the employer portion of insurance premiums does seem to negatively affect take-up, demonstrating the possibility that workers are reacting to increasing employer costs by declining health insurance. Nevertheless, the influence of OOP premiums still seems much larger than that for the employer premium.13
13. This method of accounting for employer and employee costs simultaneously shown in the last column of Table 6 produces an estimate for OOP premiums (-0.00015) which is very
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6.

Conclusion

This paper explores the sensitivity of workers to the payments their employers charge to enroll in employer-based health plans. Other researchers have found a small, but statistically significant and negative relationship between the employee share of the premium and the choice to obtain health coverage. This paper confirms this negative relationship but also finds evidence for an even smaller estimate between -0.014 and -0.017. Using a fixed effects approach with a measurement error correction, this estimate is robust to characteristics relating to the generosity of plan coverage and time invariant worker characteristics associated with insurance demand, such as worker demographics and the degree to which workers have health insurance coverage options that are available from sources other than their workplace. Even with the low price elasticity estimated in this paper, OOP premiums still explain a large proportion of the variation in take-up because these payments have increased rapidly in recent years.14 Increases in OOP premiums can explain about 60 percent of the 1.4 percentage point secular fall in take-up from 2001 to 2006. A novel finding in this paper is that employees do seem sensitive to the level of hospital coverage they are offered about 10 percent of the reduction in take-up can be explained by the decreasing generosity of hospital coverage although little or no sensitivity was found to the generosity of physician or prescription drug coverage. Also, while there was a price response in reaction to the premiums for single coverage, workers appeared insensitive to changes in the cost of family plans, which may demonstrate that families are less willing to go without health insurance, regardless of cost. The premium estimates here contrast with larger cross-sectional estimates from elsewhere in the literature, including the range derived by Cutler using the same survey from 1999, which found an estimate between -0.03 and -0.09. Although this paper uses a measurement error correction which makes comparability with previous estimates less straightforward, without correcting results for measurement error, the cross-sectional estimate of the price elasticity was -0.06 in the center of the range from the literature, but almost four times
similar to the non-measurement error adjusted value in the OOP section above (-0.00011). This result is reassuring because it confirms worker take-up is negatively-related to OOP premiums and this effect does not seem to be corrupted by the exclusion or inclusion of employer premiums. Additionally, the evidence that employees react to increases in the employer paid portion of the premium seems relatively weak since the coefficients sign reverses from positive in crosssectional estimates to negative in fixed effects estimates. 14. Exhibit 6.8 in the KFF/HRET survey (2007) shows that between 2000 and 2007, the average monthly OOP premium for single coverage increased 107 percent ($28 to $58) and the average monthly OOP premium for family coverage increased 102 percent ($135 to $273).
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that obtained using firm-level fixed effects. These sizable differences indicate omitted variables bias may be a pernicious problem in previous estimates. A final series of estimates also casts some doubt on the strength of the influence of employer-paid premiums on workers decisions to take up. By developing a more accurate estimate of health insurance demand elasticity, one implication of this paper is for estimates of the level of subsidies needed to increase insurance coverage among the uninsured who work in firms with an offer of health insurance. Since the mean take-up rate is approximately 0.84 across this six-year sample, an estimate of the monthly insurance subsidy per person required to increase coverage can be estimated. With a take-up elasticity of -0.016 and a goal of 100 percent coverage among workers with offers of coverage, monthly out-of-pocket premiums would have to be reduced almost tenfold (about 970 percent) from their current level calculated by taking the increased take-up of 16 percent and then dividing this by the elasticity estimate of -0.016, with some error due to rounding. This would effectively require reducing the monthly OOP premium in the 2001 to 2006 EHBS sample from $41.14 to $4.23. Such a reduction is not only potentially unfeasible, it may still result in an uncertain gain in coverage because some workers who have access to public or spousal coverage would not take-up their own employers coverage at any price. This paper accounts for several of the important determinants of employee take-up and derives an arguably more accurate estimate of the price elasticity for health insurance. However, it is important to remember that decomposing the causes of take-up will not fully explain changes in employer-provided insurance coverage. Changes in the rate at which firms offer health insurance and changes in employee eligibility for firm coverage will also influence coverage rates, and both have been shown to be even more critical to explaining recent coverage changes than changes in take up. Although relevant to trends in health care coverage, these factors are necessarily outside of the scope of this paper. Another implication of this study is the extent to which employees find employer sponsored insurance (ESI) affordable. Large negative responses to price increases, or largely positive income elasticities would seem to imply coverage is perceived as unaffordable. To this regard, the results of this study are mixed. At least within the range of premium values to which workers are exposed, most workers are relatively insensitive to price. This could lead one to conclude that employer coverage is generally perceived as being affordable. However, evidence in this paper also suggests that workers are sensitive to the quality of their health benefits, and that workers with lower earnings may be more sensitive to the prices that firms set to enroll in a plan. Of course, inferences about the ostensible affordability of employer plans are difficult to generalize, since those who do not take up insurance may be systematically different from workers covered by their employer across unobservable characteristics.

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The findings in this paper also have implications for health economists who may not have fully investigated the pervasiveness of measurement error in their research. Measurement error corrections can substantially change the magnitude of econometric estimates and may be applicable to a broad array of health-related topics. As the estimates in this paper suggest, measurement-error corrected estimates can greatly alter findings derived without such corrections, and may equally affect the implications for public policy drawn from such research.

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