Out of Pocket Costs and Health Insurance Take-Up Rates

Over the first ten years of this century, the share of the US population covered by employer-sponsored health insurance plans experienced a significant decline. A decrease in the take-up rate accounts for about a quarter of this decline. Usually, the increasing share of the premium that is paid by workers is used to explain the decline in the take-up rate. However, in recent years the increase in copayments, deductible and coinsurance rate has far outpaced the increase in worker contribution.

In this study we analyze the impact of out-of-pocket (OOP) costs, which consist of both workers' contribution toward the premium and expected expenditures, on the take-up rate for firms that offer multiple plan types.

Using data from the Employer Health Benefits Survey we estimated a pooled ordinary least squares and a fixed effects model. Since we have information about different types of health insurance plans offered by the firm, we derive the cross-price elasticity of coverage.

Our fixed effects estimations suggest that workers respond to an increase in the out-of-pocket contributions for Health Maintenance Organization (HMO) plans by switching to PPO plans without impacting the overall take-up rate, while workers respond to increases in the out-of-pocket contribution for Preferred Provider Organization (PPO) plans by switching to HMO plans or dropping out of the group coverage.

In general, we found that the estimated elasticities are too small to explain the overall drop in take-up rates even in light of the large increases in required worker contributions and expected expenditures. Still, we highlight the growing importance of expected expenditures in explaining take-up rates.