Dominated Options in Health Insurance Plans

Working Paper: NBER ID: w24392

Authors: Chenyuan Liu; Justin R. Sydnor

Abstract: Recent studies have found that many people select into health plans with higher coverage (e.g., lower deductibles) even when those plans are financially dominated by other options. We explore whether having dominated options is common by analyzing data on plan designs from the Kaiser Family Foundation Employer Health Benefits Survey for firms that offered employees both a high-deductible (HD) health plan and a lower-deductible (LD) option. In 65% of firms the high-deductible option would result in lower maximum possible health spending for the employee for the year. We estimate that the HD plan financially dominates the LD plan at roughly half of firms across a wide range of possible health spending needs employees might anticipate. The expected savings from selecting the HD plan are typically over $500 per year, often with no increase in financial risk. We present evidence that these patterns may arise naturally from employers passing through large average-cost differences between HD and LD plans to their employees. We discuss the implications of those dynamics for the nature of transfers between employees and the efficiency of health spending.

Keywords: health insurance; high-deductible plans; low-deductible plans; employer-sponsored insurance

JEL Codes: D22; G22; I13

Causal Claims

Cause	Effect
High-Deductible (HD) health plans (I13)	Lower maximum possible health spending for employees (H51)
High-Deductible (HD) health plans (I13)	Lower worst-case spending risk for employees (J32)
Employers passing through large average cost differences between HD and LD plans (J32)	Dynamics leading to dominated options (C69)
High-Deductible (HD) health plans (I13)	Stochastically dominating distributions of total yearly health costs (C46)
Adverse selection and moral hazard (D82)	Observed patterns in employee enrollment in HD versus LD plans (I11)