Private Payers Serving Individuals with Disabilities and Chronic Conditions. B. Background on Health Plan Choice and Utilization and Expenditures


When employees are offered two or more plans, adverse selection may result. Adverse selection occurs if people, whose poor health is unknown to insurers, choose more generous plans (Cutler and Reber, 1998; Royalty and Solomon, 1999). In this case, premiums will not cover the costs of the enrolled population. Over time, plans will be forced to raise premiums or cut services.

Plans can take actions to increase the proportion of healthy enrollees, but with uncertain results. They may attempt to avoid sicker individuals through mechanisms like pre-existing condition clauses and limitations on coverage. Conversely, they may attempt to enroll healthier individuals (known as 'cream skimming') through marketing strategies. Royalty and Solomon (1999) found that older and sicker employees at one university were less likely to switch plans due to price than were younger and healthier employees. The authors note that this is consistent with cream skimming but also with greater costs to plan switching among people with high levels of utilization. While raising out-of-pocket expenditures could drive sicker individuals out of high-cost plans, Cutler and Reber(1998) demonstrate that it will also induce healthier individuals to switch to lower-cost plans, making the overall impact of raising the portion of the cost that the patient is responsible for unclear.

Many previous studies have found evidence of differences in patients' health across different forms of insurance. A recent literature review by Hellinger (1995) determined that group- and staff-model HMOs generally attract healthier enrollees among the non-elderly population. Hellinger also reports that HMOs and PPOs that restrict an enrollee's choice of provider enjoy favorable selection among both the non-elderly and elderly populations. The RAND Health Insurance Experiment data supports a mixed conclusion. Relatively sicker and poorer HMO enrollees had both more bed days than did those in indemnity plans. Conversely, in another study, the wealthier population enrolled in HMOs had better general health than their counterparts in indemnity plans (Mark and Mueller, 1996).

A number of studies have specifically focused on the role of mental health in plan choice and how this choice influences utilization and expenditures. Deb et al. (1996) used data from the NMES to examine whether poor mental health status or poor general health status influenced the choice of insurance. Their results suggest that adverse selection may arise when individuals have the opportunity to choose between health insurance policies with different degrees of coverage for mental health care. This impact was found to be significantly more pronounced for patients who considered themselves at risk for mental illness as compared to physical illness. Perneger et al. (1995) also concluded that mental health status and utilization affected the choice of insurance.

Sturm et al. (1995) compared mental health care utilization in HMO and indemnity plans among depressed patients in the Medical Outcomes Study (MOS). They found that the average number of mental health visits was 35-40 percent lower in the HMO system. There was also evidence of adverse selection: patients switching out of HMOs used more services than predicted whereas patients switching out of indemnity plans used fewer services than predicted. In addition, patients of mental health specialists in indemnity plans were found to have lower rates of plan switching than general medical patients in indemnity plans or than HMO patients seeing either type of provider (Sturm et al., 1994). Wells et al. (1991) examined mental health and the selection of PPO providers. Results suggested that the intent to use PPO or non-PPO practitioners for general medical care was not significantly associated with mental health status. Among patients who used mental health services once a PPO became available, those who visited providers who later joined the PPO panel tended to remain with them, while those who visited providers who did not enter the PPO panel subsequently selected away from the PPO for mental health care. Patient-provider relationships appear to be an integral part of the selection of insurance.

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