The Structure of Health Plan Competition

The Structure of Health Plan Competition

May 3-4, 2007

Many proposals for comprehensive health care reform advocate competition among health plans to provide consumers with choices, restrain health care costs, and provide incentives for enhancing health care quality. These raise many questions about the benefits of health plan competition. What is competition between plans supposed to achieve? There is also the consideration of competition within a health plan among different types of service plans.

There are many critical questions regarding health plan competition. How much variation in the design of the benefit package should there be? At one extreme, all health plans might have to offer exactly the same set of benefits, co-pays, and deductibles. This permits easy comparisons based on range of providers and hospitals and quality indicators, but it limits flexibility and consumer choice. At the other extreme is unlimited flexibility in the design of the benefit package, from what services are covered at what level of deductibles to variations in co-pays and deductibles. This permits structuring of plans to meet consumer preferences. One downside is that it requires substantial information transfer to consumers; it may overwhelm individuals, paralyzing their ability to make effective choices. Furthermore, permitting a wide a range of options may facilitate the use of benefit design for adverse selection. Should there be limits on the benefit design flexibility related to services, co-pays, deductibles, etc.? What are the tradeoffs for each type of limit?

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