Health Insurance Public Policy

Health Insurance in an Experimental Market

Using real world data is fraught with complexity.  Wouldn’t it be nice to randomly change government regulations and see how people react?  A paper by Stephen Rassenti and Carl Johnston use a laboratory experiment to do just that.

In the experiment, survey participants are in charge of running a firm.  The firm must decide if it will provide health insurance for its employees and if so which plan should it choose.  Participants are randomly assigned for firms varying across firms size, high or low margin businesses, and industry.  Providing health insurance for one’s employee 1) reduces the probability they will get sick and also 2) can be used to attract employees.  However, more generous health insurance plans have an adverse impact on the firms bottom line.

The paper examines what happens under the following reform scenarios.

  • No mandates and no mandated employer contributions.
  • Employer Mandate – employers must offer insurance, but employees need not take it up
  • Employer Mandate + 50%.  Employers must offer health insurance and are mandated to pay for at least 50% of health insurance costs.
  • Individual Mandate – All U.S. residents must buy insurance, but employer has no obligation to offer it
  • Employer Mandate + Individual Mandate – Employers must offer insurance.  Individuals must buy insurance, but individuals need not buy insurance from their employer.
  • Restricted Rating – Insurers cannot increase rates on individual firms based on medical costs unless it raises rates on all other firms.  It can discriminate premiums based on firms size.
  • Individual Mandate with Ratings restriction.

In most situations, economists believe that mandates decrease societal welfare.  Limiting the choice set of employers and employees through mandates eliminates potentially optimal health insurance choices.  However, the insurance market is complex.  Mandating insurance coverage can spread risk across individuals which may increase societal equity.  Further employer mandates may improve labor market matching, since workers may be more likely to leave for a better job, if they are sure they will have health insurance in the new firm.  

How do these predictions play out in the experimental market set up by Rossenti and Johnston?


  • Individual mandates decrease worker earnings. This is not supririsng.  Forcing an individual to buy health insurance will of course decrease the percentage of people who are uninsured.  Most people who do not have insurance want health insurance, but they choose not to purchase because of the expense.  Forcing people to buy health insurance decrease the amount of fund individuals have left to pay for rent, food, and education for their children.
  • Employer Mandates.  “Employer mandates cut earnings of companies,  particularly those of small companies…and firms with low-margin businesses”
  • Employer/Individual Mandate combination.  “…the combination of employer-and individual-mandates with mandatory minimum employer contributions was associated with the lowest profit performance (and highest employee earnings) in the study. On the other hand, combining individual and employer mandates with no mandatory minimums was associated with higher company profit, higher profitability, and a substantial drop in the cost of substitutes for workers on sick leave.
  • Mandates and health.  Mandates did increase in workplace attendance (an indicator of health) in the survey.
  • Required Employer Contributions. Mandated minimum employer health insurance contributions increase employees net wage compared to an individual mandate without employer minimums, but decrease firm profitability, especially for small business and low margin businesses.  Further, mandated minimums increase firm bankruptcy risk.
  • Large Companies like mandates.  Why would a company want to force itself to pay health insurance premiums?  Since most large companies already provide health insurance, this mandate would compel its smaller competitiers to also offer health insurance.  Since they  have economies of scale, large companies can provide it cheaper than small or medium sized companies.  This gives large companies a competitive advantage in attracting superior talent.  

Healthcare Economist’s take

The experimental setting provides an interesting laboratory for testing different types of health reforms. While the experimental setting has the benefit of eliminating endogeity problems, the validity of the results depend how realistic is the experimenter’s parameterization of outcomes.  

The results do shows that mandates can affect employee earnings.  However, these changes in employee earnings could represent a short-term phenomenon. Gruber (1994) finds that the cost of the mandated maternity benefit is fully reflected in lower wages.  Thus, the increased cost to the firm of an employer mandate to provide health insurance will be reflected in a proportional drop in wages for workers in the long run.

The most interesting part of this paper is the differential effect of mandates on small and large business.  Large business are effective pooling mechanisms and can provide health insurance in a cost effective manner.  Thus, mandates to provide health insurance will have a small impact on large firm profitability.  The authors, however, run the experiment in only a domestic setting.  Large firms may not like mandates once we take into account that their foreign competition may not have to provide health insurance for their workers.  Thus, even large firms could be at a cost disadvantage, but this aspect is not part of the study.

Compared to large firms, small businesses are not an effective risk pooling institution and further do not have the economies of scale to administer health insurance plans efficiently.  When small businesses are forced to provide health insurance, the authors find that this adversely affects their bottom line and increases their risk of bankruptcy.  Mandating the businesses pay a fixed share of health insurance premiums only exacerbates this problem.


  1. So is GM’s problem with their health care an issue of providing too much coverage or their foreign competitors not having playing by the same rules?

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