The National Federation of Independent Business released important research today that tested various legislative approaches for healthcare reform and measured how each approach would affect different constituencies.
One of the first-ever applications of experimental economics to healthcare policy, the modeling tested reform proposals currently being discussed and considered by Congress. Researchers Stephen Rassenti (Chapman University) and Carl Johnston (George Mason University) built an insurance market in a laboratory and measured the outcomes on small businesses, large businesses and employees. The findings suggested that there is no panacea for health reform and that a "one-size-fits-all" solution will not work for our nation's employees and employers - small or large.
"As we tested possible approaches to healthcare reform it became clear that small business is particularly vulnerable to certain reforms. We must ensure that healthcare reform addresses small businesses' concerns around cost but we also need the system to be accessible for them and their employees," said William "Denny" Dennis, senior fellow, NFIB Research Foundation.
Subjects acted as employers for 360 "months." Each produced two goods, using virtual employees they could hire and lay off. Employers paid virtual salaries to the workers. To attract employees, firms chose which insurance policies to offer and how much to contribute toward the premiums. Employers could finish with profits or losses. Some employers were large (more than 12 employees in this experiment), and others small. Employers could grow or shrink depending on their success. Some employers had thick profit margins; others had thin margins. Employees had different skill sets, commanding different salaries.
The research tested eight legislative approaches, many being discussed by policymakers. Examples include: mandating employers to provide coverage, including a test with a minimum contribution level; mandating individuals to purchase coverage; and combining employer and individual mandates (also testing a minimum contribution level).
Key Findings
- Mandates- Employer and individual healthcare mandates, separately or combined, don't improve outcomes for all stakeholders. Some reform scenarios actually come close to making everyone worse off.
- Profit margins - Large companies with low profit margins tend to exhibit behavior similar to small companies, even though they have many employees and otherwise act 'large.'
- Small businesses are especially vulnerable - Small employers and their employees would be especially vulnerable to policy errors, which is why it is important to consider the negative impact of policy decisions on this group.
- Bankruptcy - The greatest likelihood of bankruptcy for employers occurs in the two scenarios where employers are mandated to provide insurance and pay at least 50 percent of the premium.
- Choosing an insurance plan - Employers are not better equipped to select plans for their employees, as is often alleged. Individuals (employer or employee) are better able to pick insurance plans for themselves than for others. This suggests that an employer role in plan selection may not yield additional benefits.
"This is a path-breaking, sophisticated study of healthcare reform proposals in a controlled setting," said Vernon L. Smith, co-recipient, 2002 Nobel Memorial Prize in Economic Sciences in a foreword to the study. "Of particular interest to me were the findings that no scenario of treatments makes all stakeholders better off, while some plans come precariously close to making all stakeholders worse off. Hence, we see the importance of this study in trying to identify plans with unintended consequences to be avoided, and some of the more promising alternatives that pose inevitable tradeoffs for the participants."
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