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Simulating the effects of employer contributions on adverse selection and health plan choice - Health Plan Choice

Health Services Research, Oct, 1999 by M. Susan Marquis, Joan L. Buchanan

Architects and proponents of managed competition have argued that employers must contribute equally to ali health plan premiums, a practice that would force employees to bear the real cost differences across health plans (Enthoven and Kronick 1989; Ellwood, Enthoven, and Etheridge 1992). They assert that employees will choose more competitive plans that offer better value when they face the real cost differences. Despite these assertions, recent data indicate that 88 percent of large employers that offer multiple health plan options continue to subsidize more expensive health plans (Hunt, Singer, Gabel, et al. 1997).(1) Further, some health policy consultants argue that multiple choice of health plans does not contain costs or insurance premiums (Jones 1990).

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One can then ask why employers are so reluctant to implement a strategy that is expected to reduce costs both to themselves and to their employees. Enthoven hypothesizes that this reluctance is the reason that multiple plan offerings have not been effective in containing costs, and that it stems from three sources. First, employers became committed to a policy that paid all of the costs of a fee-for-service plan when costs were much lower. Second, union leaders believe that comprehensive health benefits are a precious bargaining prize not to be eroded. Finally, employers face a collective action problem in which a single employer who adopts such a policy risks losing valued employees to competitors (Enthoven 1990).

Another unacknowledged reason for this reluctance may be drawn from several natural experiments where large employers that offered multiple plan options converted from subsidizing higher cost plans to an equal contribution policy. Data on the conversion experience from the Group Insurance Commission of Massachusetts (which serves state and local employees), the University of California, Harvard University, and large employers in Minnesota all indicate a strong plan-switching response to increased premium costs as intended (Buchmueller and Feldstein 1997; Cutler and Zeckhauser 1997; Feldman and Dowd 1993).

An unintended consequence was that the reform induced risk-based sorting across the plans (Cutler and Reber 1996). The adverse selection within the Harvard system was sufficient to drive the most generous policy out of the market within three years. The Group Insurance Commission of Massachusetts moved to contain the adverse selection by subsidizing premiums on a proportional basis and managing the most generous policy very tightly (Cutler and Zeckhauser 1997).

In the work that follows, we use microsimulation methods to demonstrate and further explore the relationship between employer premium contributions and the stability of insurance markets. We compare a fixed dollar premium contribution with one in which the employer pays a fixed share of the alternative plans. We also explore two contribution policies in which risk differences among plans are incorporated into the employer's calculation in an effort to reduce selection bias, maintain the viability of a multiple-choice offering, and encourage competition based on efficiency and not selection.

THE MICROSIMULATION MODEL

Our simulation includes two behavioral components: a model of family demand for health insurance and an individual model of health services demand. These models were originally developed and tested using data and analyses from the Health Insurance Experiment (HIE), a controlled trial of the effect of health insurance generosity on healthcare use (Buchanan et al. 1991; Keeler, Buchanan, Rolph, et al. 1988; Marquis and Holmer 1996). They have been updated and modified for the current study (Marquis and Buchanan 1992 and 1994). We use the model to simulate health insurance choices over time to investigate the effects of selection on the market equilibrium.

The Insurance Demand Model

The health insurance demand component of the model predicts a family's choice of insurance plan from among a specified set of options. In our methodology, the family has expectations about its health needs and understands how the cost-sharing provisions of different insurance plans will affect its out-of-pocket costs for healthcare given these expectations. In addition, because the structure of an insurance plan affects overall health spending for all enrollees, different plans will have different insurance premiums. The family is assumed to select the insurance plan that results in the highest expected utility. The family's expected utility from any plan depends on the insurance premium, expected out-of-pocket payments for health services given the copayment and deductible provisions of the plan, and how risk averse the family is. Specifically, a family's utility given that health insurance plan j was selected and that health state k occurred is given by:

U(k, j) = - exp(- a * n(k, j)) + w,

where n is the income available to the family for spending after payments are made for health insurance premiums and for out-of-pocket medical care expenses; the parameter a reflects the degree of risk aversion; and w is a stochastic component. The quantity n(k, j) will vary with the chosen plan because premiums and out-of-pocket payments depend on the characteristics of the insurance plan. The expected utility from choosing plan j is:

Health Care Industry

Simulating the effects of employer contributions on adverse selection and health plan choice - Health Plan Choice

Health Services Research, Oct, 1999 by M. Susan Marquis, Joan L. Buchanan

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