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Employers may be able to lower their costs for health insurance by offering more plans and making employees more price sensitive

Many economists and policymakers have argued that for employers to lower their health insurance costs, they should stimulate competition for enrollees among plans by contributing a fixed dollar amount towards premiums and offering employees multiple health plans. A new study by researchers at the Agency for Healthcare Research and Quality examines the determinants of competition among health plans in the context of a two-stage theoretical model. They show that focusing competition on the more price sensitive buyer—which can be either the employer or the employee—leads to lower prices. While the theory suggests this can be achieved either by offering very few plans or else by offering many plans, the empirical evidence suggests that prices are lowest with multiple plans and a fixed dollar contribution structure.

When employers made a fixed dollar contribution towards all plans and offered employees more than two plans, their premiums for single coverage were lowered by $480 when compared with premiums for employers offering two plans. However, increasing the number of plans led to higher premiums if the employer paid the full premium cost. Under the employer-pays-all scenario, single and family premiums increased by $441 and $1,853, respectively, when employers offered three or more plans compared with offering two plans.

These findings suggest that an employer's choice of contribution methods affects the premiums charged by health plans, note AHRQ researchers Jessica P. Vistnes, Ph.D., and Philip F. Cooper, Ph.D., and Gregory S. Vistnes, of Charles River Associates. The researchers also note that these premium differences are one of many factors employers need to consider when deciding on the number of plans to offer employees and how to structure employer contributions. Their findings are based on a two-stage theoretical model of competition in the employment-related health insurance market and an analysis of data from the Medical Expenditure Panel Survey-Insurance Component (MEPS-IC), a large national sample of employers. In the two-stage model, health plans first compete to be selected by employers and subsequently compete to be chosen by employees.

See "Employer contribution methods and health insurance premiums: Does managed competition work?" by Drs. Vistnes, Cooper, and Vistnes, in the International Journal of Health Care Finance and Economics 1, pp. 159-187, 2001.

Reprints (AHRQ Publication No. 02-R035) are available from the AHRQ Publications Clearinghouse.

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