We’ve talked about dominated plans in the recent past. I am curious how much profitability is driven by dominated plan choice.
A dominated plan is one where Plan A and Plan B have a set of relevant attributes where Plan B meets or beats Plan A on all of those attributes. B dominates A. Anyone who chooses Plan A is paying more to get the same benefits or paying the same to get worse benefits than Plan B.
A recent paper by Liu and Syndor looked at dominated plan choices in the employer sponsored insurance market **. They wanted to see how much more people paid for low deductible plans versus high deductible plans.
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.
People making the dominated choice in this scenario spend more than $500 a year in additional premiums to buy the same financial protection. $500 per member per year translates to $40 per member per month (PMPM).
$40 PMPM is a lot of money for an insurer. When I worked at UPMC Health Plan, a contribution margin of $40 PMPM from a significant chunk of the covered population would make quite a few VPs very happy as this solves a reasonable chunk of their margin generation expectations. The health plan would be providing the same services at the inefficienctly chosen plan’s higher premium level than they would have provided at the well chosen plan’s premium level. The expense side is a near constant while the revenue side is gravy.
I am very curious how much cash flow is generated for insurers on both the premium side and the cost sharing side due to dominated plan choices compared to optimal choices. My intuition is that in some markets, this wedge is notably large.
** Liu C, Sydnor JR. Dominated Options in Health-Insurance Plans [Internet]. National Bureau of Economic Research; 2018 Mar [cited 2019 Dec 11]. Report No.: 24392. Available from: http://www.nber.org/papers/w24392