Private Payers Serving Individuals with Disabilities and Chronic Conditions. A. Overview


This chapter examines the effects of indemnity and managed care insurance on health care utilization and expenditures among people with potentially disabling chronic conditions. First, we explore whether people with disabilities selectively enroll into more generous forms of health insurance. Specifically, we examined plan switching behavior among people with potentially disabling conditions and determined whether those who switch to more generous plans have higher utilization. In addition, we tested for and quantified the effect of enrollment into managed care plans as opposed to indemnity insurance on utilization and payments among people with potentially disabling chronic conditions.

In this study, the multivariate statistical methods used to estimate the effect of managed care on utilization and payments accounted for two categories of confounding influences: patient characteristics available in our data and unmeasured factors systematically related to insurance choice. Differences in patient characteristics across insurance plans may result in differences in utilization and payments. For example, if those who were older joined the indemnity plan rather than managed care, it is likely that average levels of utilization and payments would have been higher in the indemnity plan merely because of this difference. Without accounting for the different age mix across the two plans, a finding higher average utilization and payments in the indemnity plan can not be ascribed to a greater efficiency of providing services by managed care. The second type of confounding influence is also important to consider since a patient's true health is not completely observable to insurers. "Adverse selection" occurs if people whose poor health is unknown to insurers who choose more generous plans (Cutler and Reber, 1998; Royalty and Solomon, 1999). In this case, premiums will not accurately reflect costs in the population. In response, insurance plans will have an incentive to raise premiums, which may price some individuals out of the market.

The descriptive evidence on plan switching suggests that, as a group, switchers to managed care were relatively healthier and generally used fewer services than the individuals that stayed in the indemnity plans. We found that being male and younger increased the likelihood of managed care as opposed to indemnity coverage. In addition, early retirees and those having both a mental and physical chronic condition had a lower likelihood of choosing managed care.

The multivariate results indicate that enrollment in managed care as opposed to indemnity-type insurance generally reduced service utilization and expenditures. For one Employer, we found some evidence consistent with adverse selection--a situation that may result in premium increases or service cutbacks in the most generous plans through time. For the other Employer, our results suggest that some of the patients that were inherently higher users of health care services may have viewed the indemnity plan as too expensive compared to the managed care plan.

This analysis will be of interest to government policymakers who would like to set rate structures that preserve the widest choice of plans. Public and private officials can gain a better understanding of the forces that drive insurers to exit a market, thereby reducing choice and potentially hindering price competition. The results suggest that policymakers should not automatically favor managed care over indemnity plans as a way to reduce utilization or save money for chronically ill people. Likewise, businesses should not assume that they would save money by giving chronically ill employees an incentive to join managed care plans. Rather, employers and policymakers must investigate the relationship between health plan choice and potential cost savings in plan types.

Following some background on the choice of health insurance and health care utilization and expenditures under different plan types, the remainder of this chapter is organized into five sections. Section C provides an overview of the database used in this study, along with a discussion of the statistical methods used to estimate the effects of managed care on utilization and expenditures. Section D presents evidence on the extent of switching between the managed care and the indemnity insurance options, and investigates whether there were systematic differences in the characteristics of those who did and did not switch plan types. Section E describes the specific samples that are used in the multivariate analyses. Section F discusses the determinants of the choice between managed care and indemnity insurance and the effects of managed care on utilization and expenditures. The final section of this chapter summarizes the main findings. The appendices provide more detail on the conditions used to define those patients with potentially disabling chronic conditions and also contain the full set of empirical estimates discussed in the report.

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