مزایای سلامت قیمت گذاری: رویکرد حداقل کردن هزینه

We study the role of health benefits in an employer's compensation strategy, given the overall goal of minimizing total compensation cost (wages plus health-insurance cost). When employees’ health status is private information, the employer's basic benefit package consists of a base wage and a moderate health plan, with a generous plan available for an additional charge. We show that in setting the charge for the generous plan, a cost-minimizing employer should act as a monopolist who sells “health plan upgrades” to its workers, and we discuss ways tax policy can encourage efficiency under cost-minimization and alternative pricing rules

In the United States, employer-provided health benefits comprise an important part of employees’ total compensation. In 2003, approximately 69% of the population received private health insurance, and for 88% of them this insurance was employment based (DeNavas-Walt et al., 2004). The prevalence of employment-based health insurance is largely attributable to the cost of health insurance payments made through one's employer being exempt from taxation, and to employment-based group insurance being less expensive than individual (non-group) coverage due to lower per-capita administrative expenses and reduced adverse selection. Assuming workers value health insurance, these advantages make employer-provided health benefits an efficient means of compensation. This paper analyzes how an employer should design and price its health benefits when it cannot observe workers’ health care needs, given the goal of minimizing the total compensation cost of its workers. We consider an employer who offers two plans, a moderate plan, such as an HMO, and a more generous plan, such as a PPO or indemnity plan. The employer's compensation scheme therefore consists of a base wage paid to all employees, and an additional surcharge imposed on those who elect the more generous health plan instead of the moderate one.1 Although the employer may have an incentive to vary its base wage in order to influence the makeup of its workforce, in this analysis we take the employer's workforce as given in order to focus on how the employer should set the surcharge for generous coverage.2 The employer's cost-minimizing surcharge depends on several factors. When an employee elects generous coverage, he pays the surcharge to the employer, which effectively decreases that employee's wage. However, since the generous plan is more expensive than the moderate one, this wage savings is partly offset by the additional cost of the employee's health insurance. In addition, as the employer increases the surcharge, fewer workers choose the generous plan, and this effect must also factor into the employer's decision. The main insight of the cost-minimization approach is that in optimally balancing these effects, the cost-minimizing employer should act as a monopolist who sells “health plan upgrades” to its employees. The optimal program involves equating the appropriate concepts of marginal revenue and marginal cost. While the employer's monopoly power leads it to enroll too few workers in the generous plan (from a social perspective), the fact that the cost of employer-provided health benefits is not taxable induces the employer to lower the charge for generous coverage and enroll more workers in the generous plan than it would if these expenditures were treated as taxable income to the workers. When health status is private information and the employer is unable to base an employee's wage on his health status, the benefit of the preferential tax treatment is shared between the employer and the workers. An important concern with employer-provided health benefits is that an employer that offers plans of differing intensity exposes itself to adverse selection, which may jeopardize the plans’ viability. Given the choice of plans, those workers who expect to have the highest health care needs are drawn to the generous option. This adverse selection increases the average cost associated with that plan, leading the insurer to demand a higher per-worker premium from the employer. If the employer passes this price increase on to its employees, further adverse selection will result. Those in the generous plan with the lowest expected health care needs will choose to switch to the moderate plan, again increasing the average cost of caring for those who remain in the generous plan. In extreme cases, this phenomenon results in the so-called “premium death spiral” with a high premium leading to adverse selection leading to an even higher premium, the process continuing until the generous plan is no longer sustainable. Adverse selection and premium spirals have received a great deal of attention in the literature, most often in contexts in which employers follow simple, non-optimal pricing rules.3 This paper's analysis of cost-minimizing employers shows that these phenomena arise as consequences of the employer's approach to the benefits-design problem, and that adopting the cost-minimizing approach will tend to decrease their severity. A sophisticated employer should recognize that self-selection will affect the cost of any wage-benefit scheme and incorporate this into its planning. Seen in this light, the employer is not a passive force that may fall victim to adverse selection. Rather, it should design its compensation scheme in order to control selection and minimize its overall compensation cost. This paper shows that as long as there are some workers for whom the incremental benefit of the generous plan is greater than its incremental cost, the generous plan is viable (i.e., it is chosen by a positive mass of workers) when the employer prices it according to the cost-minimization rule.4 Thus, the cost-minimizing employer offers the generous plan whenever it is socially beneficial to do so. Other rules, such as the commonly employed equal lump-sum contribution rule (in which the employer pays a fixed dollar amount toward the employee's health insurance regardless of which plan he chooses) do not have this property. It may be that offering the generous plan is both socially efficient and cost effective for the employer, yet employers following the equal lump-sum contribution rule fail to offer a viable generous plan. This paper adopts a “total compensation” view of health benefits, according to which workers’ employment decisions are driven by the total value of the compensation package offered to them, i.e., both wages and insurance contribute to inducing the worker to accept employment. Although we believe our implementation of the idea is novel, the view itself is not new. Pauly (1997) espouses this approach, as does the labor economics literature on compensating differentials, summarized in Rosen (1986), which holds that in a competitive market relative wages adjust so that a worker in a particular job is just compensated for cost any extraordinary benefits (or costs) he receives. A fundamental difference between this paper and previous academic work on health benefits is in the explicit treatment of employers as acting strategically in order to minimize expected compensation cost.5 This is seen most clearly when the present paper is compared with Cutler and Reber (1998) (hereafter CR), which employs an almost identical model to study the effects of Harvard University's change in its premium contribution strategy on employee demand for its plan offerings and on plan competition. Because the analysis is descriptive, CR does not take a position on Harvard's objective in designing its benefits package; it merely documents the effects of the rule change. Focusing on the adverse selection part of the problem, this paper provides a theory of how, from its own point of view, a cost-minimizing employer should act. The paper continues with a description of the model in Section 2. Section 3 discusses cost-minimization with full information, and Section 4 derives and analyzes cost-minimizing compensation programs with private information. Section 5 discusses commonly used pricing rules, and Section 6 concludes.

This paper has considered an employer with the goal of minimizing its total compensation cost and has argued that in setting the surcharge for generous coverage, the employer should act as a monopolist who sells health insurance upgrades to its employees. At the most general level, this principle advocates a change in approach to the benefits design problem: employers’ primary focus should be on managing self-selection in order to minimize total compensation cost.27 Such an approach can ameliorate common benefits-related problems employers face. For example, by explicitly considering the cost effects of differing selection, the employer controls it, reducing the likelihood and severity of unintended adverse selection and premium spirals. The theory of firm behavior laid out in this paper provides a basis for thinking about how cost-minimizing employers will react to policy interventions such as changes in the tax code or the structure of insurance markets, and the welfare implications of such interventions. However, while we might expect employer behavior to agree broadly with the model laid out here, it should be noted that a sizeable fraction of employers explicitly adhere to ELS or EPP rules, not cost minimization.28 Those employers who are not minimizing cost may be doing so because they lack the knowledge or ability to do so, or they may be minimizing cost subject to different constraints than those considered in this paper. In either case, it may be difficult to develop robust conclusions about the effects of social policy interventions on employer behavior without a more complete positive model of how employers design their health benefits, and why. For example, while we argued that under either cost-minimization or ELS there is a tax rate that induces socially optimal sorting of workers into plans, the tax rate that does so depends on which rule the employer is using.29 Thus, while there some robust policy conclusions that emerge even in the absence of a clear positive model of employer behavior (e.g., increasing the rate of tax preference increases enrollment in the generous plan), more specific policy conclusions will depend on a more nuanced understanding of what employers are doing and why. This paper has made a number of simplifying assumptions, including assuming that all workers are equally productive, that employee demand for generous coverage depends only on health type, that the size and composition of the employer's workforce is exogenous, and that the employer has all of the bargaining power in the game with employees and insurers. While relaxing any of these assumptions would change the results somewhat, doing so would not affect the fundamental forces that drive the employer's decision. The cost-minimizing employer should merely incorporate these into its cost-minimization problem as constraints. Because they do not posit any objective for the firm, simple rules of thumb such as ELS or EPP will, in general, lead to outcomes that are suboptimal both from a social perspective and from the firm's perspective.