When Should There Be Vertical Choice in Health Insurance Markets?

Abstract

We study the welfare effects of offering choice over coverage levels—“vertical choice”—in regulated health insurance markets. We emphasize that heterogeneity in efficient coverage level is not sufficient to motivate choice. When premiums cannot reflect individuals’ costs, it may not be in consumers’ best interest to select their efficient coverage level. We show that vertical choice is efficient only if consumers with higher willingness to pay have a higher efficient level of coverage. We investigate this condition empirically and find that as long as a minimum coverage level can be enforced, the welfare gains from vertical choice are either zero or economically small. (JEL D82, G22, H75, I13, I21)

Employer risk‐adjustment transitions with inertial consumers: Evidence from CalPERS

“…We estimate the model for the time period 2015-2020 and do so separately for new enrollees only with active choice and all enrollees grouped together. The estimates for these two samples are similar, suggesting that our main specification does a good job of separately identifying inertia from other plan-specific unobserved preferences (see, e.g., Abaluck & Gruber, 2022;Handel, 2013;Marone & Sabety, 2022 for other papers that use this strategy to identify inertia separately from persistent unobserved preferences). In the main specification, the inertia term is large, suggesting that, on average, consumers leave substantial sums of money on the table by remaining in their default plan and not moving to a new option (a typical finding in the literature, Chandra et al, 2019).…”

“…Interestingly, overall, the distributional consequences of risk‐adjustment removal are relatively muted for sicker consumers relative to healthier consumers, because there is meaningful sorting of both sick and healthy consumers across plans before the removal of risk‐adjustment. This is likely due to the fact that the plans are differentiated primarily based on network rather than cost‐sharing: if CalPERS plans were instead differentiated based on cost‐sharing, it is likely that sorting would be more acute (as found in other papers with vertical plan designs, e.g., Handel, 2013, Marone & Sabety, 2022) and that, consequently, the removal of a policy like risk‐adjustment transfers would be worse for sick versus healthy people, as we see in the nest of PPO options.…”

Partial Outsourcing of Public Programs: Evidence on Determinants of Choice in Medicare

“…Average individual effects are also higher in counties that are more urban. 9 This evidence suggests age and health status are key correlates of demand for MA coverage, adding to a literature that has identified age and health status as key predictors of health care consumption in other settings (Finkelstein, Gentzkow and Williams, 2016;Brot-Goldberg et al, 2017;Marone and Sabety, 2022).…”

Health insurance menu design for large employers

“…They demonstrate this point in an empirical setting where employees choose between two plans with fixed coverage levels, one with a broad and the other with a narrow network. Marone and Sabety (2022), in a contemporaneous article closely related to ours, build on Bundorf et al (2012) and examine whether offering "vertical" choice over financial coverage levels, with a uniform pricing scheme, can be welfare improving in the context of a population of public school employees in Oregon. Consistent with our findings, Marone and Sabety predict limited gains from offerings solely ranked by financial coverage levels as many consumers select into plans that are not socially optimal.…”