...these market-oriented plans argue that, such a system, consumers will sort themselves into lower cost, higher quality plans; this pressure by consumers will provide strong incentives to health plans and their affiliated providers to control costs and increase quality in order to compete for enrollment. The Clinton administration's Health Security Act and the "premium support" proposals for reforming Medicare are variants of the managed competition approach. Although a "managed competition" model has yet to be adopted as national policy, many large employers organize their health benefits programs according to the same basic principles. Research on the behavior of employees and retirees in these employer programs provides a useful laboratory for the role of price and quality in consumer health insurance decisions.

One distinct problem for market-oriented solutions to health insurance is that, when consumers are offered a choice of health insurance options, the healthy (less risky) consumers may sort themselves into certain plans and the more risky consumers into others. Consequently, some plans will attract a disproportionate share of less costly low risk consumers, while others will attractive older, sicker consumers who are more costly to insure. This "risk selection," in turn, is influenced in part by the rules concerning how insurers are allowed to vary premiums according to subscriber characteristics. State reforms that tightened these rules provide good case studies for understanding the relationship between pricing and risk selection.

The Effect of Premiums on Consumer Health Plan Choices

Two notable experiments in "managed competition" took place in the mid-1990s: the University of California (UC) and Harvard University both offered a menu of plans that varied in generosity, but adopted a "fixed dollar contribution" policy. The plans also varied significantly in cost, so employees had a greater incentive to consider price when selecting a health plan. Because out-of-pocket premiums increased for some employees but not for others, these changes provide a natural experiment for estimating the impact of price on employee health insurance decisions. Studies that I have conducted with colleagues at the University of California, Irvine, (1) and by David M. Cutler and Sarah J. Reber, (2) analyze the effect of these policy...

NOTE: All illustrations and photos have been removed from this article.



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