Pricing and Welfare in Health Plan Choice

Abstract

Prices in government and employer-sponsored health insurance markets only partially reflect insurers' expected costs of coverage for different enrollees. This can create inefficient distortions when consumers self-select into plans. We develop a simple model to study this problem and estimate it using new data on small employers. In the markets we observe, the welfare loss compared to the feasible efficient benchmark is around 2-11% of coverage costs. Three-quarters of this is due to restrictions on risk-rating employee contributions; the rest is due to inefficient contribution choices. Despite the inefficiency, we find substantial benefits from plan choice relative to single-insurer options.

Dominated choices and Medicare Advantage enrollment

“…Greater choice promotes price and quality competition, leading to improved products at a given price (Bundorf et al, 2012; Salop, 1979). Standard theory also recognizes that consumer search is costly.…”

Selection stories: Understanding movement across health plans

“… 6 As Bundorf, Levin, and Mahoney (2008) point out, this assumes that the value of more generous coverage increases with risk more than the cost of more generous coverage, and that only risk matters for choice. …”

Imperfect risk adjustment, risk preferences, and sorting in competitive health insurance markets

“…The model developed here builds on the models developed in Einav, Finkelstein, and Cullen (2010) and Bundorf, Levin, and Mahoney (2012). The key innovation of the model is that total plan spending on an individual is divided into two components: adjusted costs and residual costs.…”

“…With respect to health insurance markets, the literature has largely focused on only three solutions to the sorting problems caused by adverse selection: restricting the contract space, subsidizing adversely selected plans, and allowing premiums to vary by expected cost (Cutler and Reber 1998; Einav, Finkelstein, and Cullen 2010; Bundorf, Levin, and Mahoney 2012; Geruso 2016, Handel, Hendel, and Whinston 2015). One of the most widely implemented solutions to the adverse selection problem, transfers or subsidies based on enrollee health status typically known as risk adjustment, has received less attention.…”

“…This assumption is common in the adverse selection literature (see Einav, Finkelstein, and Cullen (2010) and Bundorf, Levin, and Mahoney (2012)). …”