The Role of Prices Relative to Supplemental Benefits and Service Quality in Health Plan Choice

• Published date: 01 June 2019
• Author: Hendrik Schmitz,Nicolas R. Ziebarth,Harald Tauchmann,Christian Bünnings
• DOI: http://doi.org/10.1111/jori.12219
• Date: 01 June 2019

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©2017 The Journal of Risk and Insurance (2017).

DOI: 10.1111/jori.12219

The Role of Prices Relative to Supplemental Benefits

and Service Quality in Health Plan Choice

Christian B ¨

unnings

Hendrik Schmitz

Harald Tauchmann

Nicolas R. Ziebarth

Abstract

This article links representative enrollee panel data to health plan data on

(1) prices, (2) service quality, and (3) nonessential benefits for the German

statutory multipayer market and the years 2007–2010. We first show that

although heavy federal regulation ensures a simple choice architecture, the

majority of health plans are dominated—even when considering four non-

price attributes. Enrollees in dominated plans are older, less educated, and

unhealthier. Second, we assess how switchers value prices relative to non-

price health plan attributes. Our mixed logit models incorporate a total of

1,700 health plan choices with each more than 50 choice sets. While prices

are an important determinant for nearly everyone, 40 percent of all switch-

ers do not seem to value service quality and supplemental benefits when

choosing health plans.

Introduction

When it comes to regulating health insurance markets, policymakers aroundthe world

debate the fundamental question of how much choice would be optimal for con-

sumers. On the one side of the spectrum are single-payer markets like in Canada or

Christian B ¨

unnings is at the University of Paderborn, FOM Hochschule and RWI. B¨

unnings can

be contacted via e-mail: christian.buennings@upb.de. Hendrik Schmitz is at the Department of

Economics, University of Paderborn, CINCH and RWI, Germany. Schmitz can be contacted via

e-mail: hendrik.schmitz@uni-paderborn.de. Harald Tauchmann is at the Department of Eco-

nomics, Friedrich-Alexander-Universit¨

at Erlangen-N ¨

urnberg. Tauchmanncan be contacted via

e-mail: harald.tauchmann@fau.de. Nicolas R. Ziebarth is at the Department of Policy Analy-

sis and Management (PAM), Cornell University, 106 Martha Van Rensselaer Hall, Ithaca, NY

14850. Ziebarth can be contacted via e-mail: nrz2@cornell.edu. We would like to thank Dean

Lillard, Normann Lorenz, Janina Nemitz, Carsten Schr¨

oder, and participants of the iHEA 2014

in Dublin and the 2016 SOEP User Conference in Berlin for valuable comments and suggestions.

Wealso would like to thank Thomas Adolph for providing us with the data on health plan char-

acteristics and Philip Susser and Eric Maroney for editing this work. Financial support from

the BMBF (F¨

orderkennzeichen 01EH1102A)is gratefully acknowledged. We take responsibility

for all remaining errors in and shortcomings of the article.

Vol. 86, No. 2, 415–449 (2019).

2The Journal of Risk and Insurance

416

the United Kingdom that, except for supplemental private insurance, do not provide

any choice. On the other side of the spectrum is the United States where, despite an in-

creasingly stringent regulation, private insurers offermany different health plans and

still dominate the scene. While the United States has been moving into the direction

of more insurance regulation, other countries already run multi-payer systems that

combine heavy state regulation with consumer choice. Examples are Switzerland, the

Netherlands, and Germany.

Recent economic research also surrounds the question of how much regulation

would be optimal for consumers. A rich stream of articles analyzes the Medicare

Part D market in the United States (supplemental drug insurance for the elderly)

and find that many consumers do not choose the health plan that would mini-

mizes their out-of-pocket spending (e.g., Heiss et al., 2006, 2013; Abaluck and Gru-

ber, 2011). Basically, out-of-pocket spending is a function of (uncertain) demand for

health care, deductibles, coinsurance rates, copayments, and stop-loss limits. Because

many consumers seem to have difficulties to understand complex insurance prod-

ucts (Loewenstein et al., 2013; Abaluck, Gruber, and Swanson, 2015; Karaca-Mandic,

Feldman, and Graven, forthcoming), researchers have studied why consumers “leave

money on the table”—explanations range from general inertia or market frictions, to

inattention, heuristic decision rules, and switching costs (Cebul et al., 2011; Ericson

and Starc, 2012; Kling et al., 2012; Handel, 2013; Ericson, 2014; Ericson and Starc, 2015;

Handel and Kolstad, 2015; Ho, Hogan, Morton, forthcoming).1Other articles have

suggested—as well as rejected—that consumers learn and that their choices improve

over time (Ketcham et al., 2012; Ketcham, Lucarelli, and Powers, 2015; Abaluck and

Gruber, 2016). In one of the few non-Medicare articles, Bhargava, Loewenstein, and

Sydnor (forthcoming) use data from a big U.S. employer to show that most employees

choose financially dominated health plans with excess spending amounting to almost

half of the employee share of the premium.

This article is based on uniquely compiled panel data that allow us to cast light on

the choice sets and health plan architecture of the German statutory multipayer mar-

ket. We link representative enrollee survey data to publicly available data on health

plan prices and standardized quality information. Then, we exploit annual changes

in these health plan characteristics across 120 plans and over 4 years. The standard-

ized supply-side information stems from a private company that surveys and ranks

all German health plans. Thus, the empirical approach exploits the same informa-

tion that German consumers access in online portals and magazine rankings to select

health plans. In addition to prices, we make use of two nonessential benefit indi-

cators and two service quality indicators. “Nonessential benefits” are voluntarily

provided on top of the generous German mandated benefit package. Examples of

nonessential benefits include ayurveda, homeopathy, osteopathy, urine therapy,

1There exists also a rich U.S. literature on health plan choice that is not focused on irrational

behavior (Dowd and Feldman, 1994; Cutler and Reber, 1998; Royalty and Solomon, 1999;

Strombom,Buchmueller, and Feldstein, 2002; Atherly,Dowd, and Feldman, 2004; Buchmueller,

2006; Bundorf, 2010; Dusansky and Koc¸, 2010; Parente et al., 2011; Buchmueller et al., 2013).

Excellent literature overviews are provided by Kolstad and Chernew (2009) and Gaynor and

Town (2012).

The Trade-Off of Health Plan Attributes 3

417

preventive check-ups, or specific immunizations. “Service quality” is measured by the

density of the brick-and-mortar branch network (where face-to-face customer service

is provided but no medical services) and the quality and accessibility of information

via telephone hotlines and the Internet.

The main theme of the article is to study the role of prices as compared to these non-

price health plan attributes from a demand- and supply-side perspective. The existing

literature largely focuses on prices, cost sharing, and financial health plan attributes.

Our descriptive supply-side analysis suggests significant market frictions between the

120 plans, but also demonstrates a clear trade-off between price and nonprice factors.

We show that a large share of health plans are in fact not only financially dominated,

but also dominated when considering the multidimensional attributes price, service

quality, and nonessential benefits. Our demand-side analysis replicates over 100,000

choice options from 1,700 actual plan choices with each more than 50 plans to choose

from. Using mixed logit models, we find that prices are the dominant choice deter-

minant for the majority of consumers when switching plans. However, preference

heterogeneity is large—a small share of consumers value nonprice attributes such as

the quality of hotline services highly.

The article makes several contributions to the literature. First, it is one of the few stud-

ies that comprehensively investigates the supply- and demand-side of a multipayer

market outside the United States.2The German market has attractive features; due to

its heavy federal regulation, many potential confounding factors are shut down when

studying health plan choice. Specifically, Germany has no provider networks and re-

imbursement rates are centrally determined. Deductibles and coinsurance rates are

prohibited; only small and uniform copayments apply to all plans. About 120 sickness

funds (=health plans3) compete for 90 percent of the population whose large majority

is mandatorily insured. Many health plans operate nationwide and, depending on the

state of residency, the publicly insured can choose between 40 and 70 health plans.

As a comparison, in the U.S. nongroup market, which is organized at the state level

around the so-called “Exchanges,” on average 50.9 plans were offered by 3.9 insurers

in 2014 (Dafny, Gruber, and Ody, 2015). The Medicare Part D market and the Swiss

health care market also offer comparable choice sets for consumers.

Second, in addition to prices, we exploit the four consistently surveyed nonprice

attributes outlined above (two for service quality and two for nonessential benefits)

and representative enrollee information over 4 years. This allows us to cast a complete

picture of the entire market representing a total of 70 million insured.

Third, we show that substantial market frictions even exist in heavily regulated mar-

kets that simplify the consumer optimization problem substantially. Between 70 and

2Schut and Hassink (2002) and Dijk et al. (2008) study the Netherlands, Frank and Lamiraud

(2009) the Swiss market, and Schmitz and Ziebarth (2017) as well as Wuppermann, Bauhoff,

and Grabka (2014) the effects of a price framing reform in Germany. Christiansen et al. (2016)

study switching in the private long-term care market in Germany.

3We use the terms “health insurance (company),” “sickness fund,” and “health plan” inter-

changeably.