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

CHAPTER 2. HEALTH PLAN CHOICE 97
HMO, as it would be the most efficient single-plan offering for every firm in our data.
Relative to the integrated HMO benchmark, the observed plan offerings increase so-
cial welfare by almost $70 per enrollee-month for the firms in our data. Virtually
all of this is due to an increase in consumer surplus (gross of plan contributions)
rather than to a reduction in insurer costs. Indeed, insurer costs would be lowest if
all households were enrolled in the network HMO but the reduction in social surplus
would be large due the reduction in consumer surplus.
One caveat to this calculation is the logit demand specification is notorious for
generating large “new product” welfare gains. Roughly speaking, the problem is that
each new product adds a new preference dimension, and some households invariably
enjoy a large welfare gain from this addition due to the logit distributional assump-
tion. So while we think the benefits of plan choice are real, we urge some caution in
interpreting the magnitude of the measured effect.
2.5.4 Discussion and Sensitivity Analysis
Our estimates of market inefficiencies are based on a particular set of employers in a
particular geographic area. One way to address external validity is to compare our
estimates with some other studies of specific environments, such as ?, ?, and ?. These
studies all rely on data from individual large employers, and in each case, the plans
are plausibly distinguished by their level of generosity, making the environments a
bit different from ours. All three studies find evidence that more generous plans are
adversely selected. Cutler and Reber document this by using enrollee age as a proxy
for risk. The latter two studies, like ours, use data on realized costs.
Despite the difference in institutional settings, the bottom line welfare estimates
from these studies are fairly similar, and also similar to our estimates. Cutler and
Reber estimate that observed prices at Harvard University reduce welfare by around
2-4% of coverage costs relative to optimal uniform prices. Einav, Finkelstein and
Cullen estimate that in their setting average cost pricing has a welfare cost of roughly
2% relative to optimal uniform pricing. Carlin and Town find much smaller welfare