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

CHAPTER 2. HEALTH PLAN CHOICE 66
plan design, these intermediaries have begun to “risk-adjust” payments to plans (?).
Consumer prices, however, are typically not adjusted for individual risk. Indeed, in
the U.S., regulations prohibit employers and public programs from charging enrollees
different amounts based on nearly all health-related factors. 1 Moreover, even within
institutional limitations, contributions set by employers or in regulated markets may
not be welfare-maximizing given the complexities of self-selection.
In this paper, we analyze the effect of plan pricing on allocative efficiency. We
begin by making a basic theoretical point regarding plan prices and efficient match-
ing. Existing work suggests that, while poorly chosen contribution policies may lead
to inefficient outcomes, the problem can be solved by choosing an optimal uniform
contribution (e.g., ????). These analyses, however, make strong assumptions regard-
ing the correlation between enrollee risk and preferences for coverage. We show that
if these assumptions are violated, no uniform contribution policy leads to efficient
consumer choices.
The main part of the paper examines the implications of this observation. We
develop a simple econometric model of health plan demand and costs, estimate the
model on a novel dataset of small employers, and then use the parameter estimates to
simulate the welfare implications of alternative pricing policies. Based on our simula-
tions, we estimate that, in this setting, observed pricing policies are less efficient than
what could be achieved with risk-rated plan contributions. The shortfall is between
$60 and $325 annually per enrollee, or 2-11% of coverage costs. Employers could
realize approximately 1/4 of this surplus by adjusting their non-risk-rated contribu-
tions, but capturing the remainder would require setting different prices for people in
the same firm. We also find that employees select plans based on private information
about their health status. A hypothetical social planner who incorporated this private
information into prices could increase welfare by an additional $35-$100 annually per
enrollee. Despite these inefficiencies, the observed plan offerings generate substantial
benefits over any single-plan offering.
An understanding of the characteristics of the two insurers we study is important
for interpreting these results. One has a fairly broad network of providers and relies
1 Premiums vary by smoking status in some markets.