Should There Be Vertical Choice in Health Insurance Markets?

Industrial Organization of Health Care Markets

“…As discussed in more depth later, Marone and Sabety (2020) show in a large employer context that self-selection into plans limits the value of vertical plan differentiation on financial characteristics. Consumers self-select based on expected transfers while a social planner would like to target plans based on the surplus generated from risk protection as compared to the surplus lost from moral hazard.…”

“…Consumers self-select based on expected transfers while a social planner would like to target plans based on the surplus generated from risk protection as compared to the surplus lost from moral hazard. How close or far away plans are from one another in the attribute space has meaningful but subtle implications for adverse selection, as shown in Marone and Sabety (2020), Ho and Lee (2020) and Handel, Hendel and Whinston (2015).…”

“…Ho and Lee (2020) begin by studying the implications of allowing for choice of insurance plans that differ only on financial dimensions, similar to the exercise in Marone and Sabety (2020). They find, similarly, that the benefits from offering choice only just outweigh the costs that arise due to self-selection, implying only a small gain in consumer surplus from offering the best possible version of two plans rather than the best possible single plan.…”

“…Tilipman (2021) (also outlined briefly in Section 2 above) studies optimal menu design for large employers but with a different focus than Marone and Sabety (2020) and Ho and Lee (2020). He holds the financial dimension of insurance fixed and focuses on the non-financial dimension of plan choice (as discussed above in Ho and Lee (2020)).…”

“…Taken together, the Ho and Lee (2020), Marone and Sabety (2020), and Tilipman (2021) papers provide a useful set of insights about optimal menu design. They show that, on purely financial dimensions, it is not obvious that more choices will lead to higher surplus, because of the implications of self-selection into plans.…”