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

CHAPTER 2. HEALTH PLAN CHOICE 91
As the figures illustrate, the plans seem to have similar costs for enrollees with
average health risk and divergent costs for enrollees in good and poor health. The
expected monthly cost for an enrollee with a risk score of 1 is $235 for the integrated
HMO, $236 for the integrated POS, $218 for the network HMO, and $238 for the
network PPO. For less healthy enrollees, the integrated insurer has a substantial cost
advantage. The expected monthly cost of an enrollee with a risk score of two is $309
for the integrated HMO, compared to $507 for the network HMO and $413 for the
network PPO. Network plans do relatively well for low risks. The expected monthly
cost for an enrollee with a risk score of 0.5 is $198 for the integrated HMO, as opposed
to $151 for the network PPO and $74 for the network HMO.
The structure of plan costs we estimate is consistent with the basic idea that
patient cost sharing may be effective at limiting provider visits while supply-side
mechanisms may be more effective at limiting costs conditional on receiving services
(see, e.g., ?). While we do not have visit-level data to support the claim, the steep cost
curves for the network plans are consistent with cost sharing limiting visits, particu-
larly for low risks, but having little effect on the high risks who consume healthcare
on the intensive margin. In contrast, the integrated plans with their relatively low
cost sharing but stronger supply side utilization controls may be less effective at lim-
iting provider visits for low risks but more effective at managing costs conditional on
provider visits for the high risks. Another factor explaining the relatively high costs
for low risks in the integrated plan may be the greater use of preventive services.
These results also provide some insight on the potential issue of bias in the risk
scores. As discussed earlier, if the risk scores are biased, the likely direction of the bias
is an underestimate of the risk of the enrollees in the integrated plan. This is because
the risk scores are based on the types of prescription drugs used by plan enrollees
and the integrated plan more aggressively manages drug utilization. If this were the
case, then we would underestimate the cost savings for high risks generated by the
integrated plan. In other words, the large cost differentials we observe would be even
larger. While we believe that bias in the risk scores is unlikely to be an important
issue, if it exists, it would likely reinforce our key findings.
We note that our estimates for the integrated POS plan indicate that its costs