We all know that the Rube Goldberg machine known as the American health care system is riddled with misincentives that reduce its efficiency. But Leemore Dafny, Katherine Ho and Mauricio Varela point to a big source of loss we’d never seen discussed: the waste inherent in the lack of choice offered with most employer-based health plans.
Roughly four out of five employers who still provide group health insurance offer only one plan to their employees. The reason is straightforward: a single plan saves administrative costs and generates better risk pooling. But the three economists point out that the approach creates deadweight efficiency losses by preventing employees from choosing the package of services best suited to their individual preferences. What’s more, the likely magnitude of those losses is staggering. Based on some plausible assumptions (along with data from some 800 large U.S. firms over the period 1998-2006), they estimate that insured workers would be willing to trade 10-40 percent of the health care subsidies they now get from employers for access to a wider variety of plans.
Designing a health plan menu that eliminated much of this waste would not be easy, however. Providing options that created serious “adverse selection” problems – for example, offering maternity coverage as a stand-alone option – would be out of the question. But there surely is room out there for creative thinking in designing plans that offer varying co-pays and deductibles, varying provider networks, and the like.
Note, too, the implications for national health care reform. Pretty much any approach that gave employers incentives to expand coverage options from private insurers – say, in the spirit of the market for private supplemental coverage under Medicare – would generate far more bang for a buck than employer-based insurance-as-usual.