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Income, Health, and the Value of Preserving Options

Abstract

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.

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Notes

  1. 1.

    Additional details on the dataset construction using the Person file and the Family file in the NHIS along with STATA code used in the analysis are available upon request from the authors.

  2. 2.

    In aggregate time series estimations where endogeneity issues are common, one can often lag an endogenous variable to achieve exogeneity. Even though we have cross-sectional data, the chronic condition variable has a similar “pre-existing” time element, as it is defined in terms of duration of a health condition.

  3. 3.

    See Fernandez (2001) for a model of school funding using an additively separable utility function in consumption and educational quality.

  4. 4.

    As nothing significant would change with the inclusion of a lump sum discovery cost, we assume here that once health condition is revealed, discovery of relevant provider quality is costless. However, an interesting refinement of the model might include discovery costs that varied with family characteristics. For example, discovery costs might be lower for families with higher education levels or higher for families with limited English language proficiency.

  5. 5.

    In simulations not reported here but available from the authors, using higher quality OON providers yielded higher utility at the high and low ends of the severity range, while staying in-network yielded higher utility at intermediate severity levels. The range over which staying in-network yielded higher utility was wider the lower the family’s income level.

  6. 6.

    If we interpret a monetary unit as $1000, these figures are roughly equal to the average employee share of family premium plus deductible for each type of plan in the Kaiser Family Foundation 2010 employer survey.

  7. 7.

    Additional simulation results available from the authors.

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Correspondence to Rachel Kreier.

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Kreier, R., Sengupta, B. Income, Health, and the Value of Preserving Options. Atl Econ J 43, 431–448 (2015). https://doi.org/10.1007/s11293-015-9479-x

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Keywords

  • Real options
  • Health plan choice
  • Preferred provider organization
  • Quality of care
  • Health disparities

JEL

  • D00
  • D80
  • I00