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Dominated Options in Health-Insurance Plans

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  • Chenyuan Liu
  • Justin R. Sydnor

Abstract

Recent studies have found that many people select into health plans with higher coverage (e.g., lower deductibles) even when those plans are financially dominated by other options. We explore whether having dominated options is common by analyzing data on plan designs from the Kaiser Family Foundation Employer Health Benefits Survey for firms that offered employees both a high-deductible (HD) health plan and a lower-deductible (LD) option. In 65% of firms the high-deductible option would result in lower maximum possible health spending for the employee for the year. We estimate that the HD plan financially dominates the LD plan at roughly half of firms across a wide range of possible health spending needs employees might anticipate. The expected savings from selecting the HD plan are typically over $500 per year, often with no increase in financial risk. We present evidence that these patterns may arise naturally from employers passing through large average-cost differences between HD and LD plans to their employees. We discuss the implications of those dynamics for the nature of transfers between employees and the efficiency of health spending.

Suggested Citation

  • Chenyuan Liu & Justin R. Sydnor, 2018. "Dominated Options in Health-Insurance Plans," NBER Working Papers 24392, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24392
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    References listed on IDEAS

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    5. Keith Marzilli Ericson & Philipp Kircher & Johannes Spinnewijn & Amanda Starc, 2021. "Inferring Risk Perceptions and Preferences Using Choice from Insurance Menus: Theory and Evidence," The Economic Journal, Royal Economic Society, vol. 131(634), pages 713-744.
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    15. Saurabh Bhargava & George Loewenstein & Justin Sydnor, 2017. "Choose to Lose: Health Plan Choices from a Menu with Dominated Option," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(3), pages 1319-1372.
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    Cited by:

    1. Nicholas Tilipman, 2022. "Employer Incentives and Distortions in Health Insurance Design: Implications for Welfare and Costs," American Economic Review, American Economic Association, vol. 112(3), pages 998-1037, March.

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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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