THE VALUE OF CONSUMER CHOICE AND THE DECLINE IN HMO ENROLLMENTS

Health insurance contracts may restrict consumers' choice of medical provider (e.g., hospital) in order to minimize moral hazard inefficiencies. In this article, I assess the economic value of this strategy by comparing the estimated “option value” that consumers assign to provider choice to the negotiated discounts that insurers can achieve by negotiating with a restricted set of providers (i.e., volume discounts). Using a panel of federal employees' health plan choices from 1999 to 2003, I show that the practice of selective contracting (SC) with a limited set of hospitals reduced health maintenance organization (HMO) plans' expected utility by $62–$118, on average, for a standard reduction in the provider choice set. I also conduct simulations which show that by 2003 health plans using SC were theoretically unable to achieve sufficiently large volume discounts from hospital providers to fully compensate for the associated utility losses. My results help to explain the flight from HMO enrollments that occurred in the early 2000s. (JEL I10, I11, L15, D83, D12)