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CHAPTER 2. HEALTH PLAN CHOICE 88
2.5.1 Model Estimates
Table 2.4 presents parameter estimates from three different specifications of the de-
mand model. 21 The first column is a baseline model where we do not instrument
for plan contributions, and do not allow for private information about household
risk. The second and third columns instrument for plan contributions using the pre-
dicted values from the contribution model (2.8). The third column, which is our
preferred specification, allows for private information about risk. To scale the utility
to money-metric form, we divide each coefficient by the coefficient on the monthly
contribution and adjust the standard errors accordingly. We report the price effects
as semi-elasticities at the bottom of the table.
Effect of Demographics and Risk on Choice
The demand estimates indicate that overall sorting on the basis of risk is rather
modest, but that different plans experience unfavorable selection across differing com-
ponents risk. Older employees, who on average cost more to insure, prefer the network
HMO and the integrated POS plan to the integrated HMO. An additional year of age
is associated with an increase in the willingness to pay for the network HMO relative
to the integrated HMO of $1.75 per month (Column 1). Because older people are
often in worse health, they are likely to place a higher value on the broader provider
network of the network plan which would give them greater freedom in choosing
among providers. Women, who at the age of workers in our data typically cost more
to insure than men, prefer the integrated HMO to either the integrated POS plan
or the network PPO. Women are willing to pay $35 per month less than men for
the network PPO relative to the integrated HMO (Column 1). Women may have
stronger preferences for the integrated HMO if they perceive that it is more effective
in providing preventive cares since, in this age group, more preventive services are
recommended for women than for men. The effects of age and sex are not particularly
sensitive to the use of instruments for the employee contribution (Column 2) or the
21 The Table does not report every parameter. The parameters not reported are the plan fixed
effects, and the coefficients on imputed household income and an indicator for non-standard drug
coverage.