The role of product design in consumers' choices in the individual insurance market.

OBJECTIVE: To evaluate the role of health plan benefit design and price on consumers' decisions to purchase health insurance in the nongroup market and their choice of plan. DATA SOURCES AND STUDY SETTING: Administrative data from the three largest nongroup insurers in California and survey data about those insured in the nongroup market and the uninsured in California. STUDY DESIGN: We fit a nested logit model to examine the effects of plan characteristics on consumer choice while accounting for substitutability among certain groups of products. PRINCIPAL FINDINGS: Product choice is quite sensitive to price. A 10 percent decrease in the price of a product would increase its market share by about 20 percent. However, a 10 percent decrease in prices of all products would only increase overall market participation by about 4 percent. Changes in the generosity of coverage will also affect product choice, but have only small effects on overall participation. A 20 percent decrease in the deductible or maximum out-of-pocket payment of all plans would increase participation by about 0.3-0.5 percent. Perceived information search costs and other nonprice barriers have substantial effects on purchase of nongroup coverage. CONCLUSIONS: Modest subsidies will have small effects on purchase in the nongroup market. New product designs with higher deductibles are likely to be more attractive to healthy purchasers, but the new benefit designs are likely to have only small effects on market participation. In contrast, consumer education efforts have a role to play in helping to expand coverage.

Individual health insurance within the family: can subsidies promote family coverage?

This paper examines the role of price in health insurance coverage decisions within the family to guide policy in promoting whole family coverage. We analyze the factors that affect individual health insurance coverage among families, and explore family decisions about whom to cover and whom to leave uninsured. The analysis uses household data from California combined with abstracted individual health plan benefit and premium data. We find that premium subsidies for individual insurance would increase family coverage; however, their effect likely would be small relative to their implementation cost.

How much risk pooling is there in the individual insurance market?

OBJECTIVE: To examine how much pooling of risks occurs among potential purchasers in the individual market, how much pooling occurs among those who purchase coverage, and whether there is greater pooling among longer-term enrollees. DATA SOURCES: The data are administrative records for enrollees in individual insurance plans in California in 2001, and from a survey of Californians enrolled in the individual insurance market and the uninsured. STUDY DESIGN: Logit models were estimated for 5 health outcome measures to compare the insured and uninsured after adjusting for other factors that affect insurance status and health. Multivariate models were also estimated to explore the relationship between health and three measures of pooling in the market: plan type, pricing tier, and the actuarially adjusted premium paid by the enrollee. PRINCIPAL FINDINGS: Those who purchase individual health insurance are in better health than those who remain uninsured. On the other hand, a large share of people with health problems does obtain individual insurance. The distribution of subscribers across plan type and pricing tier varies with their health status. Those in poor health are less likely to purchase low benefit plans. There is less separation of risks for those who become sick after enrollment based on the measure of pricing tier. The distribution of subscribers across plan type for those who have health problems at enrollment and those who become sick differs, but so does the distribution of those who become sick and those who remain healthy. CONCLUSIONS: Despite small differences among the healthy and sick, our results support the conclusion that there is considerable risk pooling in the individual market. To some extent, this pooling occurs because underwriting happens at the time people enroll and there is greater pooling among those who become sick than those who enroll sick. Our results however suggest that health savings accounts may further fragment the market.

The role of the safety net in employer health benefit decisions.

The potential for sizable crowd-out of private expenditures by public insurance and delivery programs has been demonstrated. However, there is limited evidence about whether this stems from decisions of employers about their health benefit package or by decisions of workers. This study focuses on the role of public programs on employer decisions to offer insurance and the amount the employer contributes to the premium, using data from a large survey of employers and a database describing community characteristics. The study finds that both public insurance and public delivery programs have a significant effect on employer decisions, but the magnitude of the effect is small. Policies to limit crowd-out should focus on incentives to make continued private insurance purchase attractive to workers rather than incentives to employers.

Using contingent choice methods to assess consumer preferences about health plan design.

INTRODUCTION: American insurers are designing products to contain health care costs by making consumers financially responsible for their choices. Little is known about how consumers will view these new designs. Our objective is to examine consumer preferences for selected benefit designs. METHODS: We used the contingent choice method to assess willingness to pay for six health plan attributes. Our sample included subscribers to individual health insurance products in California, US. We used fitted logistic regression models to explore how preferences for the more generous attributes varied with the additional premium and with the characteristics of the subscriber. RESULTS: High quality was the most highly valued attribute based on the amounts consumers report they are willing to pay. They were also willing to pay substantial monthly premiums to reduce their overall financial risk. Individuals in lower health were willing to pay more to reduce their financial risk than individuals in better health. DISCUSSION/CONCLUSION: Consumers may prefer tiered-benefit designs to those that involve overall increases in cost sharing. More consumer information is needed to help consumers better evaluate the costs and benefits of their insurance choices.

Is the individual market more than a bridge market? An analysis of disenrollment decisions.

The individual insurance market is perceived by many to provide primarily transition coverage, but there is limited research about how long people stay in this market and what affects their disenrollment decisions. We examine these issues using administrative records and survey data for those enrolled in the individual market in California. We conclude that there is less turnover in this market than is commonly believed. We find that economic factors and coverage characteristics are important in the decision to disenroll, but that perceptions about insurance and the health care system also affect this decision.

Health insurance for workers who lose jobs: implications for various subsidy schemes.

A number of proposals have been made to help laid-off workers purchase health insurance. We use data from the 1996 Medical Expenditure Panel Survey to profile the insurance status of workers who left a job. Our descriptive analysis suggests that it might be difficult to design policies that target those who would otherwise be uninsured and that large subsidies might be needed to help laid-off workers.

Employment transitions and continuity of health insurance: implications for premium assistance programs.

We use data from two nationwide panel surveys to explore whether premium assistance programs can provide stable insurance for low-income children. We estimate that low-income children who are newly enrolled in an employer-group plan would keep that coverage longer than similar children keep newly acquired public insurance. We conclude that group coverage could provide a source of insurance for eligible low-income children that is more stable than public insurance. However, only one-third of low-income uninsured children have access to group insurance, and most low-income children with access to a group plan are enrolled in it. Thus, premium assistance programs are difficult to target effectively, and other programs are necessary to reach the majority of uninsured children.

The role of the individual health insurance market and prospects for change.

The individual market is the only source of health insurance for the more than 20 percent of Americans not eligible for group or public health insurance; yet participation rates are low and shrinking. This paper examines this market's structural features and assesses the likelihood that it will play an expanded role in the future. We describe how pressures such as cost growth, new technologies, and changes in the nature of the workplace are shaping the individual market. We conclude that the future of the market will depend largely on whether there are policy interventions that balance the problems of affordability, risk sharing, and adverse selection.

Trends and variability in individual insurance products in California.

This paper examines recent trends in benefits and premiums for individual health insurance products purchased by Californians. There is much variability in the coverage available in the individual insurance market, with correspondingly wide variability in premiums. Despite concerns about increased consumer cost sharing, the average share of health spending covered by these products has remained constant between 1997 and 2002. Whether this trend can continue in the face of higher health costs is unclear.

On using sample selection methods in estimating the price elasticity of firms' demand for insurance.

We evaluate a technique based on sample selection models that has been used by health economists to estimate the price elasticity of firms' demand for insurance. We demonstrate that, this technique produces inflated estimates of the price elasticity. We show that alternative methods lead to valid estimates.

Employer-sponsored insurance: how much financial protection does it provide?

The authors examine the generosity of private employer health insurance coverage using data from two large national surveys of employers. Generosity is measured as the expected out-of-pocket share of medical expenditures for a standard population, given the provisions of the coverage. On average, those covered by employer-sponsored insurance can expect to pay 25 percent of expenditures out of pocket. There is little variability across plans in this share, though plans offered by smaller employers are somewhat less generous than those offered by larger employers. Individuals who incur high costs pay a smaller share of the bill than do those with lower levels of spending. The generosity of employer-sponsored plans increased slightly in the 1990s.

Subsidies and the demand for individual health insurance in California.

OBJECTIVE: To estimate the effect of changes in premiums for individual insurance on decisions to purchase individual insurance and how this price response varies among subgroups of the population. DATA SOURCE: Survey responses from the Current Population Survey (http://www.bls.census.gov/cps/cpsmain.htm), the Survey of Income and Program Participation (http://www.sipp.census.gov/sipp), the National Health Interview Survey (http://www.cdc.gov/nchs/nhis.htm), and data about premiums and plans offered in the individual insurance market in California, 1996-2001. STUDY DESIGN: A logit model was used to estimate the decisions to purchase individual insurance by families without access to group insurance. This was modeled as a function of premiums, controlling for family characteristics and other characteristics of the market. A multinomial model was used to estimate the choice between group coverage, individual coverage, and remaining uninsured for workers offered group coverage as a function of premiums for individual insurance and out-of-pocket costs of group coverage. PRINCIPAL FINDINGS: The elasticity of demand for individual insurance by those without access to group insurance is about -.2 to -.4, as has been found in earlier studies. However, there are substantial differences in price responses among subgroups with low-income, young, and self-employed families showing the greatest response. Among workers offered group insurance, a decrease in individual premiums has very small effects on the choice to purchase individual coverage versus group coverage. CONCLUSIONS: Subsidy programs may make insurance more affordable for some families, but even sizeable subsidies are unlikely to solve the problem of the uninsured. We do not find evidence that subsidies to individual insurance will produce an unraveling of the employer-based health insurance system.

Participation in a public insurance program: subsidies, crowd-out, and adverse selection.

This paper examines how varying the level of subsidies affects participation in a public insurance program, crowd-out of private insurance, and adverse selection. We study the experience in Washington's Basic Health program in 1997. Findings show that adverse selection is not a problem in voluntary public programs. Increasing subsidies have only modest effects on participation in subsidized programs, though the gains are not at the expense of the private market. Overall participation in the subsidized plan is also modest, even though participants benefit from it. The challenge to policymakers is to find program design characteristics, beyond subsidies, that attract the uninsured.

The managed care backlash: did consumers vote with their feet?

The managed care backlash led many to predict the demise of health maintenance organizations (HMOs). This paper examines trends in HMO enrollment in all metropolitan communities from 1994 to 2000 to identify factors that led to diminishing enrollment in the backlash era and circumstances in which HMOs maintained or expanded their presence. We use a database constructed from a wide variety of sources that describe HMO penetration and other characteristics of all metropolitan statistical areas. We found the backlash is not evidenced in a large degree of consumer switching. However, HMOs were more likely to maintain their presence in areas with high-cost growth and with greater managed care experience. Medicaid HMO growth continued to expand rapidly, indicating the possibility of a two-tiered system in which low-income beneficiaries have less choice than the privately insured.

Growth of consumer-directed health plans to one-half of all employer-sponsored insurance could save $57 billion annually.

Enrollment is increasing in consumer-directed health insurance plans, which feature high deductibles and a personal health care savings account. We project that an increase in market share of these plans--from the current level of 13 percent of employer-sponsored insurance to 50 percent--could reduce annual health care spending by about $57 billion. That decrease would be the equivalent of a 4 percent decline in total health care spending for the nonelderly. However, such growth in consumer-directed plan enrollment also has the potential to reduce the use of recommended health care services, as well as to increase premiums for traditional health insurance plans, as healthier individuals drop traditional coverage and enroll in consumer-directed plans. In this article we explore options that policy makers and employers facing these challenges should consider, including more refined plan designs and decision support systems to promote recommended services.

Attrition in the RAND Health Insurance Experiment: a response to Nyman.

In a prior article in this journal, John Nyman argues that the effect on health care use and spending found in the RAND Health Insurance Experiment is an artifact of greater voluntary attrition in the cost-sharing plans relative to the free care plan. Specifically, he speculates that those in the cost-sharing plans, when faced with a hospitalization, withdrew. His argument is implausible because (1) families facing a hospitalization would be worse off financially by withdrawing; (2) a large number of observational studies find a similar effect of cost sharing on use; (3) those who left did not differ in their utilization prior to leaving; (4) if there had been no attrition and cost sharing did not reduce hospitalization rates, each adult in each family that withdrew would have had to have been hospitalized once each year for the duration of time they would otherwise have been in the experiment, an implausibly high rate; (5) there are benign explanations for the higher attrition in the cost-sharing plans. Finally, we obtained follow-up health-status data on the great majority of those who left prematurely. We found the health-status findings were insensitive to the inclusion of the attrition cases.

Consumer-directed health care: early evidence about effects on cost and quality.

Demand for consumer-directed health care (CDHC) is growing among purchasers of care, and early evidence about its effects is beginning to emerge. Studies to date are consistent with effects predicted by earlier literature: There is evidence of modest favorable health selection and early reports that consumer-directed plans are associated with both lower costs and lower cost increases. The early effects of CDHC on quality are mixed, with evidence of both appropriate and inappropriate changes in care use. Greater information about prices, quality, and treatment choices will be critical if CDHC is to achieve its goals.