Fast Focus
	Employer-sponsored health insurance creates stable risk pools because healthy employees are less likely to jump ship.
	Insurers can craft more generous health plans for employers with a stable workforce.

Stable Relations

Compelling reseach finds it's the healthy who distort the insurance market, and employer-sponsored health insurance plans are the best cure.

By  Keith Crocker and John Moran

EDITOR’S NOTE: Two economists have independently explored the individual and group markets to explain why employer-sponsored plans present the best option for health insurance. This article is adapted from a study conducted by Keith Crocker, a leading U.S. economist in the insurance field, and health economist John Moran. Both are professors at Pennsylvania State University. The study was published in the Winter 2003 issue of the Rand Journal of Economics.

With group health insurance likely to come under attack next year with the arrival of a new administration in Washington, we are publishing this, the most compelling research in the group benefits industry, in the hopes that government regulators will understand the importance of employer sponsored plans and their affect on the quality of health insurance.

Why is it so easy to purchase an individual life insurance policy, but extremely painful to purchase an individual health insurance policy? If you answer that question, you begin to understand the reasons behind the economics of group health insurance—especially employee groups sponsored by a business.

Employer-sponsored health insurance remains the dominant means of providing private health insurance in the U.S. In 2006, about 90% of privately insured, non-elderly Americans received coverage through an employer-sponsored plan. While employer-sponsored insurance is encouraged through federal tax policy (it’s a business expense), group plans are almost always less costly than individual plans because they mitigate adverse selection and the costly underwriting practices that it engenders.

In contrast to individual life insurance, the demand for individual health insurance is quite small and attracts only a modest fraction of insurers. In 2003, for example, only about a quarter of the roughly 20% of Americans without access to an employer plan or public health insurance were covered by an individual policy.

The absence of a large, well-functioning market for individual health insurance is a key distinction between health insurance and virtually every other type of insurance.

There are several explanations for this:

· The business tax subsidy;

· A low level of consumer demand that results from either high premiums or younger adults’ myopic behavior;

· The “crowding out” of the private market by public health insurance programs such as Medicaid and State Children’s Health Insurance Program; and,

· The greater likelihood of adverse selection in the individual market.