The Effects of Offering Health Plan Choice within Employment-Based Purchasing Groups

summarized by Nasrul

This paper finds that the availability of choice is associated with greater enrollment by employees in employer-sponsored plans but less generous coverage on average among covered workers. Heterogeneity in preferences across employees may arise from variation in health risk as well as variation along other dimensions, such as preferences for a particular style of care or set of providers. If health risk is the primary factor, health plan choice can be viewed as a mechanism to establish a separating equilibrium among employees, with the resulting risk segmentation extending coverage to previously uninsured, low-risk workers. If selection of workers across plans relates primarily to preferences for plans or providers, then adverse selection is not at play. The availability of choice within a firm stimulates competition that reduces insurer profit margins or other components of premiums that this analysis could not observe. Although choice is associated with lower average plan premiums, the effect appears to be driven primarily by a reduction in the average generosity of the coverage. The general concern is that, because choice is not randomly assigned to firms, those that choose to offer multiple plans may differ from those that do not in unobservable ways that are correlated with the outcomes I examined. For example, employers may offer more plans in response to low enrollment or to compensate for plan stinginess. A potential way to address this issue would be to identify an instrument that affects whether an employer offers choice, but is not related to these unobservable firm characteristics. The welfare implications of reducing rates of coverage within a firm depend both on the value workers place on coverage and the extent to which those who decline coverage from their own employer access insurance through another source such as a public program or an alternative employer. The net effect for individual workers also depends upon whether they were compensated for reductions in the generosity of health benefits with corresponding increases in cash wages or other fringe benefits. The results of the paper are consistent with employers offering a choice of health plans in response to variation among employees in their preferences for health insurance.