An Individual Health Plan Exchange: Which Employees Would Benefit and Why?

On average, US workers fortunate enough to be offered health insurance through their place of work are given a small number of choices: 80 percent of firms, accounting for 37 percent of workers, offered only one plan in 2005. Although there are merits of limited choice— including lower administrative costs for sponsoring employers, and better pooling of risk within a given employee population—substantial consumer surplus is forgone by preventing employees from selecting plans that best suit their needs. In Dafny, Ho, and Varela (2010), we build a model to quantify this deadweight loss. Using data on plan offerings and enrollment for 800+ large US firms in 139 geographic markets, over the period 1998–2006, we estimate a model of consumer preferences for characteristics of health plans. We use the parameters of that model to predict employee choices under different hypothetical scenarios of expanded choice, assuming employers’ total outlays for health insurance remain constant and plans are made available to new enrollees at “large group rates.” We quantify those gains for each employee group-year we observe (for example, Big Box Retailer’s employees in Houston in 2003), and conclude these gains are sizable compared to average premiums. We estimate that employees would be willing to forgo ten to 40 percent or more of their employer subsidies for the right to apply those subsidies to the plan of their choosing, with the exact magnitude depending on the demand specification as well as the definition of the expanded choice set. An Individual Health Plan Exchange: Which Employees Would Benefit and Why?