This paper is now forthcoming in the RAND Journal of Economics.

Abstract

We provide a framework for large employers designing a menu of health plan offerings that differ on both financial and non-financial dimensions. Using detailed administrative data from Harvard University, we estimate a model of plan choice and utilization, and evaluate the benefits of cost sharing and plan variety. For this population of employed consumers, and a single plan with a generous out-of-pocket maximum and zero deductible, we find that modest cost sharing of approximately 30% maximizes average employee surplus. Further gains from offering choice are limited if based solely on financial characteristics, but can be meaningful if paired with differentiation along other dimensions where consumer preferences are correlated with efficient coverage levels.