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THE VALUE OF CONSUMER CHOICE AND THE DECLINE IN HMO ENROLLMENTS

Authors

  • GERARD J. WEDIG

    1. Wedig: William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, NY 14627. Phone 585-273-1647, Fax 585-442-6323, E-mail wedig@simon.rochester.edu
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    • The author would like to thank Sanjog Misra, Bill Schwert, Jerry Zimmerman, seminar participants at the Simon School, the editor, and two anonymous referees for useful comments on earlier drafts of this article.


Abstract

Health insurance contracts may restrict consumers' choice of medical provider (e.g., hospital) in order to minimize moral hazard inefficiencies. In this article, I assess the economic value of this strategy by comparing the estimated “option value” that consumers assign to provider choice to the negotiated discounts that insurers can achieve by negotiating with a restricted set of providers (i.e., volume discounts). Using a panel of federal employees' health plan choices from 1999 to 2003, I show that the practice of selective contracting (SC) with a limited set of hospitals reduced health maintenance organization (HMO) plans' expected utility by $62–$118, on average, for a standard reduction in the provider choice set. I also conduct simulations which show that by 2003 health plans using SC were theoretically unable to achieve sufficiently large volume discounts from hospital providers to fully compensate for the associated utility losses. My results help to explain the flight from HMO enrollments that occurred in the early 2000s. (JEL I10, I11, L15, D83, D12)

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