essays in public finance and industrial organization a dissertation ...

CHAPTER 2. HEALTH PLAN CHOICE 89
incorporation of unobserved risk (Column 3).
We find some sorting on the basis of health status conditional on age and sex,
driven primarily by having a very high risk household member. The effects of the
linear risk score on plan choice are generally small and imprecise. Households with
a high risk member, however, are less likely to enroll in the network HMO and more
likely to enroll in the network PPO than the integrated HMO. In our preferred spec-
ification (Column 3), an employee with a high risk family member is willing to pay
$28 per month more than an employee without a high risk family member to enroll
in the network PPO relative to the integrated HMO. This is consistent, once again,
with those who are more likely to use care placing a greater value on less restrictive
provider networks.
Our results also suggest that private information about health risk plays a role
in plan choice, although the estimate is not precise. We estimate that the standard
deviation of private risk information σµ is 0.68, which is substantial relative to the
standard deviation of the observed risk scores (1.56 in Table 2.1). Roughly speaking,
observed risk scores appear to pick up just over 2/3 of the health status information
that factors into plan choice.
While our findings with respect to risk selection are not inconsistent with existing
research, they suggest a relatively complex pattern of sorting. Much of the existing
literature finds evidence of unfavorable selection into more generous plans (??) .
We also find that the highest risk enrollees favor the most flexible plan, the network
PPO. Overall, however, the average risk across plans is quite similar due to off-
setting selection along different demographic dimensions, including age and gender,
that are correlated with risk. This finding is consistent with the idea that the plans
cater to individuals with different tastes for health care, rather than offering different
quantities of care, or targeting individuals of different health status.
Effect of Plan Prices on Choice
In the bottom panel, we present price semi-elasticities of demand, defined as the
percentage decrease in market share resulting from a $100 increase in the annual
enrollee contribution, evaluated at the mean choice probability for each plan. On