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insurance, either because demand is a function of state income or because policymakers respond

to insurance tastes in setting state tax rates (Gruber and Washington 2005).

However, estimates based on exogenous price changes may have limitations that outweigh

the advantages of avoiding endogeneity. For example, workers may respond differently to a

hypothetical choice compared to an actual choice. Alternatively, results from experiments

conducted on a small scale may not be representative of results that would be obtained in the

general population.

C. EMPLOYEE CHOICE OF PLAN

Many mid-sized or large employers offer more than one plan, allowing the opportunity to

measure the propensity of workers to switch among health plans in response to a change in price.

As a result, there is a relatively large literature estimating the price elasticity of demand with

respect to alternative plan choices offered by employers.6 This literature is particularly important

for understanding the potential of managed competition, when employers or government

programs may foster competition among plans to constrain the cost of coverage. Managed

competition has taken on a new dimension with the introduction of consumer-directed health

plans (CDHP) as a plan option. While research on the demand for CDHPs generally has focused

on the experience of a few large groups, a small number of studies provide some early insights

about how consumers in general may respond to the offer of a CDHP. These studies are

reviewed at the end of next section.

1.

Range of Estimates

A large number of studies have estimated the effect of employee premium contributions

(price) and other factors on employees’ enrollment decisions when given a choice of plans.

6

While individuals in the non-group market also face a choice of plans, this elasticity has not been studied.

19

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