Income, Health, and the Value of Preserving Options

We model family choice among health plans taking account of family, insurer and health care provider (e.g., doctor) characteristics not addressed by earlier models. We use an additively separable utility function permitting an intuitive treatment of how families trade health against consumption, and how income and health risk influence that trade-off. Health care provider quality affects expected health outcomes and the family’s choice set includes health maintenance organization and preferred provider organization (PPO) plans. We model how families value the PPO’s option to use out-of-network providers taking into account uncertainty about future diagnoses and incomplete information about provider quality. The model’s predictions are consistent with enrollment patterns in the National Health Interview Survey. The approach has implications for cost control and income-related disparities in quality of care. Copyright International Atlantic Economic Society 2015