Consumer Choice and the Decline in HMO Enrollments

Abstract

The previous decade witnessed a consumer “backlash” against cost-reducing models of health insurance that restrict consumers’ decision rights and choices. In this paper I test the hypothesis that consumers’ positive valuation of provider choice lead to a flight from HMO enrollments in the early 2000’s. Using a panel of federal employees’ health plan choices from 1999-2003, I show that the practice of selective contracting (SC) with hospitals reduced HMO plans’ expected utility by $62-$118 for a standard reduction in the choice set. Consumer valuations of choice increased between 1999-2003, simultaneous with their migration towards less restrictive plans. My data indicate that plans did not match choice-related utility reductions with compensatory premium reductions. I conduct simulations that show that health plans using selective contracting could not achieve sufficiently large volume discounts from hospitals to compensate for the associated utility losses.

Keywords: Health Care Markets, Information, Choice, Insurance

JEL Classification: I10, I11, L15, D83, D12