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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8. Based on data from the 1989 survey of firms by the Health Insurance Association of America.

9. The contribution for the PPO, C(PPO), is then calculated as: N(PPO)* C(PPO) + N(HMO) * C(PPO) * [R(HMO/R(PPO)] = C(Ave) * N, where N(PPO) and N(HMO) denote the expected enrollments in each plan (from the prior period); N is the total enrollment in both plans; C(Ave) is the average contribution amount the employer budgeted; and R(PPO) and R(HMO) are the risks in each plan. The contribution amount for the HMO, C(HMO), is then C(HMO) = C(PPO) * [R(HMO)/R(PPO)]. Separate calculations are made for each family composition unit for which premiums are established.

10. The contribution for the PPO, C(PPO), is then calculated as: C(PPO) = C(Ave) + (PPO actual premium - PPO adjusted premium) where the PPO adjusted premium = PPO actual premium/[R(PPO)/Group Risk]. The HMO contribution is established to maintain the budgeted, average employer contribution.

11. Tessler and Mechanic (1975); Wolfman (1961); Friedman, LaTour, and Hughes (1984).

12. This finding was also reported in other simulation analyses based on similar models from the RAND Health Insurance Experiment (Marquis 1992).

13. In our model, the result is driven by the choices of families of two or more. Virtually all of them prefer the HMO under the fixed percent of premium policy as the employer contribution increases, whereas they choose the PPO plan under the ratio method.

14. The premiums shown in the table reflect only the monetary cost; they do not include the cost of restricted choice.

15. We investigated several alternative assumptions about the relationship between the value of choice and risk. When those in families with risk above the 25th percentile value choice, we obtain results similar to the case in which all families value choice. When those with risk about the 75th percentile value choice, we obtain solutions as when those above the median value choice. And when those with risk above the 90th percentile value choice, the results are similar to those when choice is not a valued attribute.

REFERENCES

Bowen, B., and E. Slavin. 1991. "Adjusting Contributions to Address Selection Bias." In Advances in Health Economics and Health Services Research, Vol. 12 edited by R. M. Scheffler and L. E Rossiter, pp. 77-96. Greenwich, CT: JAI Press.

Buchanan, J. L., E. B. Keeler, J. Rolph, and M. Holmer. 1991. "Simulating Health Expenditures Under Alternative Insurance Plans." Management Science 37 (9): 1067-90.

Buchanan, J. L., and M. S. Marquis. 1999. "Who Gains and Who Loses with Community Rating for Small Business?" Inquiry 36, no. 1 (spring): 30-43.

Buchmueller, T. C., and P. J. Feldstein. 1997. "The Effect of Price on Switching Among Health Plans." Journal of Health Economics 16 (3): 231-47.

Cantor, J. C., S. H. Long, and M. S. Marquis. 1995. "Private Employment-based Health Insurance in Ten States." Health Affairs 14 (summer): 199-211.

Cave, J. 1985. "Equilibrium in Insurance Markets with Asymmetric Information and Adverse Selection." In Advances in Health Economics and Health Services Research, Volume 6, edited by R. M. Scheffler and L. F. Rossiter. Greenwich, CT: JAI Press.