Distance to Physicians and Value of Choice in Individual Health Insurance

Health insurance plans differ vertically and horizontally. Horizontal differentiation ---largely driven by differences in providers’ networks--- is a primary reason for choosing oligopolistic competition in health insurance marketplaces as market design for the non-group private market for health insurance (Dafny, Ho, Varela; 2013). If horizontal differences are not valued by buyers, however, alternative designs under which the uninsured are assigned to the same carrier ---chosen through a competitive procurement process (Diamond; 1992)--- would limit welfare losses from adverse selection and imperfect competition.

In this paper, we combine individual-level enrollment decision in the California health insurance marketplace regulated under the ACA with the universe of hospital, clinics, and physicians’ networks covered by each insurer in the marketplace. We adopt a reveled preferences approach to identify and estimate the money-metric value of providers’ networks across different groups of buyers. With these estimates, we compare consumer surplus under the status quo to the consumer surplus if only a limited set of insurers are left in the market.

Young households without children value shopping on premium more than shopping on networks, while older households and households with children incur a large loss if only narrow networks are available in the market.

In counterfactual simulations we show that if a large network PPO plan was the only option in the market, and this plan was pricing to extract a 15% markup (85% medical-loss-ratio), the median consumer would be better off than under the status quo. Ongoing work evaluates alternative policies including the offering access to networks of providers as observed in the Medicare Advantage market, and in the Medicaid Managed Care market.