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Imagine trying to measure poverty, even determine financial aid, by looking at only an individual’s assets, and not the resources of the entire family. The result: well-intentioned but misguided efforts to assist those truly in need. That’s largely what health care policymakers are up against when crafting fixes to expand coverage to the uninsured. The reason: most data sources track health insurance trends at the individual level rather than at the family or household, level. But recent economic research examining household decisionmaking around health insurance is giving policymakers more precise information on which to base decisions.

Interview with Anne Beeson Royalty, Ph.D., Associate Professor, Indiana University-Purdue University at Indianapolis (IUPUI)

IUPUI’s Anne Beeson Royalty examines issues connecting labor and health economics. As employer-provided insurance has become a vital fringe benefit and component of a worker’s overall compensation, policymakers require a better understanding of the nexus between the provision of benefits and labor market decisions. Royalty, who recently served as Visiting Associate Professor at Stanford University, has examined the phenomena of workers trading wages for health insurance and vice versa, the effect of employee take-up of employer-sponsored coverage, as well as how household job decisions are affected by the offering of employer-paid health insurance. In her work, Royalty has found that two wage–earner families get substantially added protection when it comes to health insurance. Single-income households, meanwhile, are far more vulnerable and at risk of losing insurance during job loss, divorce and other transitions. Royalty spoke with ERIU about what this means for crafting better targeted policies to expand health insurance coverage.

What does your work in the area of health insurance decision-making among two-income families attempt to capture?

ROYALTY: Most employers offering health insurance offer family coverage. So people have access to employer-provided insurance not only through their own job but possibly through a working spouse. When assessing whether an employer-based system is working or not, we have to consider how people are accessing that system. Is it through a working spouse, on their own, or both. This research is an attempt to get a more complete picture of how that employer-based system is working.

Do two-wage earner families have better access to health insurance overall? If so, why? And to what extent?

ROYALTY: Yes. Having a second earner in the household provides improved access to coverage. Even if one worker doesn’t have access to employer coverage, the second earner may. To what extent? Substantially. A second wage earner increases the possibility of having access to employer-based health insurance by 18 percentage points, or a 28-percent increase in the probability that a family would have access to the employer system.

Do two earner households also have more generous coverage typically than households with just one full-time worker?

ROYALTY: Yes, because they have access to more health plans, they’ll likely have more choice among plans, including PPOs and other ‘freedom of choice plans.’ They also have significantly lower out-of-pocket premiums if they choose the lowest cost plan, because the family has more options—even if each worker’s employer offered only one plan.

What is the one-wage earning family paying in premiums on average versus the two-wage earner household?

ROYALTY: In 1996, two-earner households had access to an average minimum out-of-pocket premium for family coverage of $988, compared to $1,205 for one-earner households, which paid $217 more per year.

What percentage of families gets coverage from the husband’s employer versus the wife’s employer?

ROYALTY: Of husbands whose employers do not offer insurance, 43 percent had wives who were offered employer insurance. But nearly two-thirds (65 percent) of the wives who were not offered insurance by their employer had husbands who had offers. So, the wives are gaining more in some respects from the dual earner deal than the husbands, although it is still a substantial effect for those husbands. We also find that 86 percent of husbands who do have an offer of employer insurance are covered by their own employer. In contrast, 72 percent of wives who have an offer from their own employer are covered by their own employer. The women are more likely, even if they have an offer, to actually enroll in their husband’s plan.

What does that tell you?

ROYALTY: Recognizing the importance of family coverage made us more aware about the transitions people go through. For women who are not enrolled in their own employer coverage, the stability of their marriage has an effect. That is important to keep in mind, as we think about the future of the system. When things change—if one spouse loses a job, or your marriage breaks up, or the children reach some age in which they are no longer eligible—some people don’t have that access to that coverage any longer. Some of what we see is not people who are forever uninsured; they have had insurance and now have lost that for one of these reasons.

How does the bigger picture of the uninsured change when you look at it from the household level rather than from the individual level?  

ROYALTY: It is very important to look at it from the family or household level because we lose important information otherwise. For example, the household may have access to health insurance, even if one of the workers does not. We lose that information if we just look at the individual level. Secondly, household decision-making may impact how well policies aimed to increase access to health insurance are working. How folks are making decisions about their work jointly and whether or not their spouse has health insurance can change the labor decisions they make.

We found evidence showing how when one spouse has health insurance it influences the likelihood of the other spouse having coverage, and whether that spouse will be working full-time or not. A spouse with health insurance makes it less likely that the other spouse will work full-time. As we think about policies to increase coverage, say through targeting small firms or part-time workers, we need to take into account that some people may be working part-time in part because they don't need health insurance, as they already have it through their spouse. That certainly is not the case for all part-time workers, but it is something to consider as we design policies.

So in what ways do two-wage earner families make decisions about coverage?

ROYALTY: We find that if your spouse has health insurance, you are less likely to work and you are less likely to work full-time. This is true of both spouses. In our sample of married workers, we find that 88 percent of men and 52 percent of women work 35 hours or more. If 88 out of 100 men are working that much now; only 86 of them would work that much if we increased the probability of their wives having access to employer insurance by 10 percentage points. For women, the change in full-time work would reduce it from 52 out of 100 to 51 out of 100. While not an enormous effect, this definitely tells us that access to health insurance affects people's labor market decisions. The bottom line is that health insurance access coming from the employer is driving some other labor market decisions, which has some repercussions. Some folks are working full-time just to get health insurance. We can make it better if we weren’t linking health insurance and full-time work.

How do things change from a policy perspective about how we can protect people from becoming uninsured or expand coverage?

ROYALTY: One thing this research highlights is that the protection offered by the employer system extends to the household. We might be able to expand coverage by making the eligibility rules more generous – allow more leniency in who qualifies to be covered as a dependent under an employer plan. Some states such as New Jersey have done this lately by raising the age limit for children to be able to stay on their parent’s health insurance. So, that’s one way. We could expand eligibility to other family members such as older children, for example.

Even if we expand eligibility significantly, we still would have to be thinking about policies that target people when they lose that eligibility for some reason and also people who despite those expansions, don't have any other way in. This would include single people who are older and don't have any other family connections that can provide them with eligibility.

Also, as we design policies, such as giving subsidies to encourage workers to take up insurance offers, we have to consider the demand for that employer-provided insurance in the context of what else workers have available. Again, if a worker chooses to work part-time because they have access to coverage through their spouse, we are may not see a big increase in their take-up of their own employer-provided insurance regardless of subsidies or other incentives if the spouse's plan remains more generous or if the part-time worker is the one less attached to the labor market.

So, how can we better target policies?

ROYALTY: It may not be so much a policy fix as a different approach to assessing these different policies. As long as the part-time worker we are referring to has access elsewhere, then we shouldn’t be so worried. But we are going to have to look within the context of the family to know whether or not we are reaching the relevant workers—the ones who want employer-provided health insurance and don’t have access to it elsewhere.

What are your thoughts about President Bush’s proposal to delink employment from health insurance by transferring the employer exclusion to an individual deduction for individuals buying health insurance?

ROYALTY: To the extent that the President’s tax deduction proposal or earlier tax credit proposals begin to break the link between health insurance access and employment—and these policies would do this by allowing the deduction or credit for either employer or private non-group insurance—they will lessen the labor market inefficiencies associated with the link between employment and health insurance. For example, some people could work part time and not worry about having to work full time in order to access reasonably priced insurance.

But let's think about how this might affect the uninsured. Many of the uninsured have such low incomes that they would not benefit at all from a tax deduction. The tax relief for many others would be very small relative to the cost of insurance. I don't think these tax deductions are going to be enough for most of those who are uninsured.

How about regarding tax credit proposals? How does this all work?

ROYALTY: Tax credits would be preferable to a tax deduction in terms of the incentives provided to lower income families since a tax deduction is less valuable the lower your income. Tax credits could even, as some have proposed, be structured with a sliding scale so as to provide greater benefits to those with lower incomes.

However, for either the case of tax credits or tax deductions, it is not clear what the net effect on insurance coverage would be. Depending on the size of the tax relief relative to health insurance premiums, we could see increased coverage but if too many employers dropped coverage in response to the program, we could see losses in coverage. As our work shows, decreased access to employer insurance has effects not just for the affected worker but for that worker's family as well.

What is the biggest take away for policymakers of your research?

ROYALTY: We really need to make sure we understand what is going on with health insurance at the household level. Things look a lot different if we consider access to employer-sponsored health insurance at the family level than if we look at each worker separately. Also, to better target coverage during the transitions people face, we need to look for ways to expand eligibility so that more people are offered access through some other means than simply through their own employer.

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Funded by The Robert Wood Johnson Foundation, ERIU is a five-year program shedding new light on the causes and consequences of lack of coverage, and the crucial role that health insurance plays in shaping the U.S. labor market.