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Description
I use data from the University of California to empirically examine the role of social learning in employees' choices of health plans. The basic empirical strategy starts with the observation that if social learning is important, health plan selections should appear to be correlated across employees within the same department. Estimates of discrete choice models in which individuals' perceived payoffs are influenced by coworkers' decisions reveal a significant (but not dominant) social effect. The strength of the effect depends on factors such as the department's size or the employee's demographic distance from her coworkers. The estimated effects are present even when the model allows for unobserved, department-specific heterogeneity in employee preferences, so the results cannot be explained away by unobservable characteristics that are common to employees of the same department.
1. Introduction
* Individuals often have incentives to learn from their neighbors before making economic decisions. In some cases, other individuals' choices serve as signals of private information, so learning comes from merely observing their actions--for instance, a typical tourist will (rationally) avoid empty restaurants and prefer those that are crowded with locals. In other cases, information and experiences are shared directly through conversation, as when a consumer planning to buy a car asks her friends about their experiences with different brands or different dealers. A role for social learning exists whenever grouped agents use independent information to make parallel decisions involving uncertain payoffs.
The objective of this article is to quantify the impact of social learning in a specific context: individuals' choices of employer-sponsored health plans. Using data from five University of California campuses, I show that health plan choices are "clustered" within departments: the choices of employees in the same department are too similar relative to what we would expect based on individual characteristics and campus-wide patterns. I estimate econometric models of health plan choice that explicitly allow for social learning and find large, statistically significant effects that are robust across campuses and model specifications.
Health care market performance is a matter of considerable policy importance, and understanding demand in health care markets is essential to credible policy analysis. In the demand for employer-sponsored health insurance, uncertainty about product quality plays a critical role. As with other experience goods, the quality of a health plan (or one's match quality with a health plan) is very difficult to know ex ante, and choosing the "wrong" plan can be costly--especially because the costs of switching can be high. This suggests that providing information--which employers generally do by distributing brochures or hosting benefits seminars--is critical. But in some cases the most valuable information comes from others who have already experienced the experience good. By assessing the significance of peer influence in employees' health plan selections, this article sheds some light on the process through which information diffuses in a large organization, and it also speaks to the importance of peer recommendations in the demand for experience goods more generally.
While the findings on health plan enrollment decisions are interesting in their own right, this article's contribution to the broader literature on social learning extends beyond the specific context of health plan choice. A growing body of theoretical research has incorporated social learning into standard models of economic decision making, showing that social effects can alter those models' predictions in important ways. (1) However, social effects have been notoriously difficult to quantify empirically, in large part due to identification problems that have been described in detail by Manski (2000). Of principal relevance is the difficulty distinguishing between what Manski calls "endogenous interactions," in which individual decisions are influenced directly by the decisions of their peers, and "correlated effects," in which the decisions of individuals within a group are similar due to shared (and possibly unobservable) characteristics. Previous empirical studies have attempted to resolve this issue in a variety of ways, with varying degrees of success.
Relative to the existing empirical literature, the contribution of this article is to analyze a dataset in which the presence of social learning can be demonstrated convincingly even while directly allowing for unobserved heterogeneity. The data permit a rich set of comparisons and tests that distinguish social learning from correlation in unobserved preferences. Most directly, the panel nature of the data allows me to simultaneously estimate social effects and department-specific unobservables. The estimated social effects are somewhat smaller but remain significant when department-specific unobservables are included. A different robustness check (similar in spirit to Munshi and Myaux (2000)) examines the own- and cross-group influences among faculty versus staff, finding that own-group effects are large and statistically significant, while cross-group effects are in most cases indistinguishable from zero. Moreover, the own-group effects are no larger among faculty than among staff, even though the common unobservables problem is probably more relevant to faculty.
Another well-known difficulty of estimating models with social interactions is that observed choices are jointly endogenous: coworkers' choices cannot be regarded as exogenous influences, since they are in turn influenced by the choice of the employee in question. Rather than incorporating some notion of equilibrium in the estimation, as some authors have suggested, I handle this issue by focusing solely on newly hired employees: I assume that new hires are potentially influenced by the observed choices of existing employees, but not vice versa. (I explain in Section 3 why this is a reasonable assumption.) This approach has the obvious advantage of simplifying the estimation problem, and it also focuses the model's attention on employees who are actively making health plan decisions.
Social-learning hypotheses have been studied previously in many other contexts, including crime (Glaeser, Sacerdote, and Scheinkman, 1996), labor supply (Woittiez and Kapteyn, 1998), contraception (Munshi and Myaux, 2000), adoption of fertilization technology (Conley and Udry, 2000; Munshi, 2000), welfare program participation (Bertrand, Luttmer, and Mullainathan, 2000), stock market participation (Hong, Kubik, and Stein, 2001), and labor market outcomes (Bayer, Ross, and Topa, 2005). The study most similar to this one is that of Duflo and Saez (2002), who examine individuals' decisions about whether to enroll in a university-sponsored retirement plan. Although similar in spirit to the present analysis, the instrumental variables approach used by Duflo and Saez is fundamentally different from the identification strategies employed here, which rely primarily on data variation over time and across campuses. (2) Also, this article specifically addresses the issue of quantifying social effects in a polychotomous discrete choice setting.
2. Background and data
* The University of California (UC) system is made up of university campuses plus four additional research laboratories. Nearly all full-time employees and some part-time employees are eligible to enroll in one of the health plans offered through the UC benefits program. The typical employee at a UC campus can choose from one of three HMOs (Health Net, Kaiser, and Pacificare), (3) a point-of-service (POS) plan (UC Care), and a traditional fee-for-service plan (Prudential High option). The HMO plans typically require little or no out-of-pocket payments from the employee, while the POS plan requires monthly out-of-pocket payments ranging from $17-$50 (depending on the number of dependents to be covered under the employee's plan). Enrollment in the fee-for-service plan is extremely rare, since the out-of-pocket payments required are on the order of $1,000 per month. Employees who choose not to enroll in one of the available plans are automatically given minimal coverage through a default "Core Medical" option. (4) Plan enrollments by campus are shown in Table 1 for the year 2000.
The data used in this study were provided by the UC benefits office. The data cover employee health plan decisions for the years 1995-2000 at each of the nine university campuses; I will focus attention on the five largest campuses: Berkeley, Davis, Irvine, Los Angeles, and San Diego. For each employee, the data indicate the plan chosen by the employee, the department in which the employee works, the date the employee was hired, and the employee's monthly salary, along with additional demographic characteristics including age, sex, and zip code of residence. Family status can be roughly inferred from the coverage type chosen with the health plan (single-party, two-party, or family). The availability of relatively rich demographic information is critical in this study, in particular since we expect individual-level heterogeneity in preferences over health plans to be driven largely by differences in age, income, and place of residence. Price considerations play a diminished role in health plan decisions: though the decision of whether to enroll in the POS plan or an HMO may be driven by cost concerns (the POS plan costs $15-$45 more per month than the HMOs), decisions among the three HMOs are based on nonprice considerations, since the employee premiums are essentially the same (zero in most years), and the required copays (e.g., for office visits or prescription drugs) are also generally uniform across plans. The set of available options and the corresponding pricing structure has remained constant over the sample period for most campuses, with only a few minor changes. (5)
Each campus has a benefits office responsible for disseminating information about the available health insurance options. Newly hired employees are encouraged to attend orientations in which the plans (along with other employee benefits) are explained, and brochures with basic information are typically mailed to employees prior to periods of open enrollment.... |
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