# Managed Care and Employer Health Insurance Offerings

Daniel Polsky and Sean Nicholson have two papers which aim to look at employer health insurance offerings.  The first [Polsky, Nicholson (2004)] tries to estimate the factors driving the cost differences between HMO plans and non-HMO (eg: PPO, indemnity) plans.  The authors deconstruct the cost differences into three factors:

1. Utilization Effect: this occurs if individuals enrolled in an HMO plan use fewer services than those in a non-HMO plan.
2. Risk Selection Effect: this phenomenon appears if HMO enrollees are generally healthier than non-HMO enrollees.
3. Reimbursement Effect: this is apparent if HMOs negotiate lower payments to providers–for instance by offering higher volume–than do non-HMO plans.

The authors have an ingenious way of estimating this.  They use the 1996/1997 Community Tracking Study (CTS) to estimate the following equation:

• M=b_1*H + b_2*X + v

The medical resource use (‘M‘) is a function of whether or not the individual is in an HMO (‘H‘) as well as observable characteristics (‘X‘).  The error term ‘v’ is composed of the sum of a random element (‘e‘) as well as the unobservable characteristics (b_3*Z)  It is possible to estimate b_1 and b_2 consistently only if Cov(H,Z)=0.  The authors accomplish this by estimating the above equation for individuals whose employer offers them no choice of health plan–thus risk selection should not be a problem.  In order to determine the reimbursement effect, the authors estimate prices for each service using the MEPS.  Below are the formulas for each effect.  The coefficients are all estimated from the subsample with no choice (C=0) for the employee.

1. Utilization Effect: b_1
2. Risk Selection Effect:
1. Observable: b_2*X{H=1,C=0} -b_2*X{H=0,C=0}
2. Unobservable: b_2*X{H=1,C=1} -b_2*X{H=0,C=1}
3. Reimbursement Effect: [p{H=1}S{H=1}-p{H=0}S{H=1}] – [p{H=0}S{H=1}-p{H=0}S{H=0}].  This is done for each service type and summed over all services.

The results of the study are that HMO expenditures per person were \$188 lower (9.3% lower) than non-HMO expenditures per person.  Utilization Rates and Risk Selection were similar for HMO and non-HMO plans.  The difference was made up from different reimbursement rates for providers.

This paper is very clever econometrically and the CTS gives a wide variety of useful variables for the study.  The key assumption to this paper is that employees do not choose their work based on the health insurance that it offers (which Bhattacharya and Vogt would disagree with).  The authors claim if unhealthy employees choose jobs with non-HMO health insurance, then the utilization effect would be biased downward and the unobserved risk selection estimate would be biased upward.  Thus, one cannot even sign the direction of this problem.

A second paper by Polsky and Nicholson, et al. (2005) uses the CTS data set as well.  It examines the factors which determine whether a worker takes up the health insurance offered by their employer.  A worker can choose to take-up the insurance of their employer, choose an ‘alternative insurance’ (such as government provided insurance or go on a spouse’s health insurance plan), or elect to remain uninsured.  A multinomial logit regression finds that single individuals generally take up an HMO plan if it is the only one offered, but married individuals often refuse to take up the HMO plan if it is the only one offered.  Married individuals have a choice to be on their spouses insurance while single individuals are left with a choice of either state health insurance or expensive individual insurance.

The authors also use the CTS employer survey to estimate the cost of the plans offered to employees.  They estimate the cost to the employer (premium) and the cost of the plan to the employee (net premium).  They find that a higher net premium reduces employee take-up but a higher premium does not affect take-up rates.  Unsurprisingly, younger, less educated and poorer families are more likely to forgo health insurance.

Some problems with this paper are the authors assume that the employer does not offer health insurance strategically.  This is unlikely.  The authors showed that when a firm offers only a HMO plan, a married worker is likely to take-up insurance with their spouse.  Thus, offering parsimonious coverage will reduce a firms costs by causing many of its employees to move off their roles.  The authors also assume that employees do not select jobs according to the generosity of their health insurance, and that the net premium workers pay is also exogenous.  Both assumptions are unlikely to be proven true in reality.

Polsky, Daniel; Nicholson, Sean; (2004) “Why are managed care plans less expensive: risk selection, utilization or reimbursement?” The Journal of Risk and Insurance, pp. 21-40.

Polsky; Stein; Nicholson; Bundorf ;(2005) “Employer health insurance offerings and employee enrollment decisionsHealth Services Research, pp. 1260-1278