Job Market Paper

Competition in Employer Sponsored Health Insurance: Implications for a Public Option

156 million Americans obtain health insurance through an employer. High premiums and concerns about access have led to proposals to introduce a “public option,” where the government would provide a public insurance plan to compete with private insurers. In the absence of an existing public option to study, I combine data on employer-insurer contracting and a structural model of supply and demand to predict market outcomes under various assumptions about the design such a policy. The model incorporates variation in employers’ demand for health care, preferences over insurers, and the degree to which employers find it costly to switch between insurers. Insurers set employer-specific premiums allowing them to price discriminate. I find that insurers’ ability to price discriminate substantially limits demand for the public option that cannot. More employers abandon the private market when the public option successfully replicates the quality of existing insurers and more aggressively regulates payments to health care providers. However, even a public option that obtains substantial market share does little to lower markups because employers who remain privately insured strongly prefer their private insurer, have large switching costs, and receive risk-rated premium offers that dominate the premiums of the public option.