Health Insurance Demand Responses from New Price Structures Offered by Consumer Directed Health Plans Stephen T Parente $,# Roger Feldman # Jean Abraham # Jon B Christianson # University of Minnesota Department of Finance $ and Division of Health Policy and Management # Funded by the Robert Wood Johnson Foundation Health Care Financing and Organization Initiative (HCFO) and the Department of Health and Human Services

Presentation Overview  Consumer Driven Health Plan Overview  Research Questions  Data & Analytic Approach  New (and early) Plan Choice Estimation Elasticity Results  Limitations  Summary  Next Steps

‘Classic’ CDHP Model – Definity Health Definity Health Care Advantage Web- and Phone- Based Tools Health Tools and Resources Care management program Internet enabled Health Coverage Preventive care covered 100% Annual deductible Expenses beyond the HRA Health Reimbursement Account (HRA) Employer allocates HRA 1 Member directs HRA Roll over at year-end Apply toward deductible 2 Annual Deductible Preventive Care 100% Health Coverage Annual Deductible 1 Employer selects which expense apply toward the Health Coverage annual deductible. 2 Paid out of employer’s general assets. HRA $$

Economic Analysis Motivation  ‘Donut hole’ and savings account are new ‘prices’ to consider in the demand for health insurance with expected negative and positive responses, respectively.  Price sensitivity to different benefit options (i.e., premium, account, donut, coinsurance) could significantly affect take-up of CDHPs.  Builds on existing literature of high deductible health plans (HDHPs) (Keeler, Newhouse, Phelps, 1977). CDHPs (and in particular HSAs) introduce a new kink in the budget constraint.

Conceptual Model of CDHP Money Medical Care CDHP Budget Coinsurance Plan Budget b a c Low Use Medium Use High Use

Data Sources  health plan choice data from 4 large employers participating in a Robert Wood Johnson Foundation funded study on CDHPs with national representation. Employee premium CDHP Account contribution Deductible Coinsurance Employee characteristics: Worker’s age, gender, wage income, single/family coverage

Plan Choice Model Analytic Approach  Plan Choices: HMO, 3 PPOs (low, medium, high), 3 CDHPs with Health Reimbursement Accounts (low and high)  Utility-maximization assumption where U hj =  j +  Z j +  X hj + e hj  Estimate a conditional logit model of plan choice using the pooled, employer data Explanatory variables  Plan attributes (Z) Annual tax-adjusted employee premium ($1000s dollars) Savings/reimbursement account size ($1000s dollars) Donut hole: difference between annual deductible and account size ($1000s dollars) Coinsurance rate (i.e.,.10 = 10% coinsurance)  Interactions between employee and plan attributes (X) Age, female, wage income, family contract  Plan-specific constants (  j )

Plan Choice – Descriptive Statistics Notes: Chronic illness measure is for the household. Income is wage income.

Price elasticity estimates from the plan choice Model 1: Use only prices and plan effects

Price elasticity estimates from the plan choice Model 2: Add income, dependents, gender, age

Price elasticity estimates from the plan choice Model 3: Add health status and interact w/prices

Results from full plan choice model  Compared to a low option PPO: Age affects  Positive High option PPO effect  Negative CDHP effect Income effects  CDHP has greatest positive relationship  All plans are positive compared to low option PPO Gender effects  Positive High option PPO effect  Negative CDHP effect Chronic illness effects  CDHP has greatest and large positive relation  High option PPO has negative effect Family coverage effects  Negative relationships across the board compared to low option PPO.  Strongest negative effect in low-option PPO.

Limitations  These are early results and are contrary to our previous findings (e.g., only income was highly correlated to CDHP choice).  Need to use nested logit approach to deal with IIA.  Claims based risk adjustors could have missing data issues.  Firm specific effects may be in plan that we not accounted for. Why – we are using this model for CDHP simulation in combination with MEPS.  Low premium elasticity needs to be thoroughly examined. Is this a real effect of increasing the price of employer-offered insurance through deductibles and copayments. If real, this may explain the very low take-up in CDHPs with significant cost-sharing benefit design attributes.  Don’t account for cross-price elasticity effects.

Summary  Premium, coinsurance and Donut can and ALL should be modeled when looking at CDHPs.  They produce different and significant effects.  Across the largest set of employers examined to date, we evidence of some favorable election to CDHPs in with respect to age, but not chronic illness.  Policy proposals will need to consider price effects to develop effective welfare improving social policy.

Next Steps  CDHP & PPO Branches for Nested Logit Design.  Examine impact of other policy proposals and/or HSA plan designs on take-up.  Refresh model with choices currently being collected, including HSA choice in the FEHBP population.

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Plan Choice – Conditional Logit (1 of 3) Adjusted r-square: , Reference PPO_Low

Plan Choice – Conditional Logit (2 of 3) Adjusted r-square: , Reference PPO_Low

Plan Choice – Conditional Logit (3 of 3) Adjusted r-square: , Reference PPO_Low