Who Has a Choice of Health Plans?

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Sally Trude

As managed care transformed the health system during the 1990s, policy makers debated whether consumers should be protected through regulation -- such as patient protection laws -- or through the marketplace. For market forces to serve consumers effectively, people needed access to a choice of plans and reliable information on which to base their decisions. Survey data from the Center for Studying Health System Change (HSC) suggested that more consumers had plan choice than was commonly assumed: 64 percent of families could choose between health plans, according to the 1998-1999 Household Survey. That was two percentage points higher than two years earlier.

How Much Choice Did Consumers Have?

Whether consumers played any meaningful role in the transformation of health care depended on whether they could actually select plans suited to their needs. Many were restricted to whichever single plan their employer had chosen. If too few people had a choice, plans felt little competitive pressure to respond to consumer preferences.

Plan choice also shaped satisfaction. Research had shown that consumers were more satisfied with their health plan -- regardless of plan type or restrictions -- when they had chosen it themselves. Some analysts suggested the managed care backlash was driven less by the actual experience of managed care and more by the feeling of being locked into a plan without alternatives.

Estimates of plan choice varied widely -- from 42 percent to over 60 percent -- depending on the data source and how choice was defined. Most estimates were too low because they measured only whether an individual employee was offered multiple plans at work. The HSC Household Survey found that 53 percent of employees offered employer-sponsored insurance had a choice through their own employer.

But health insurance typically covers the entire family, so measuring choice at the individual employee level missed the full picture. When both spouses worked and each was offered a plan through their employer, the family had a choice between at least two plans even if neither spouse individually had a choice. Taking this family-level perspective, 64 percent of families offered employer-sponsored insurance had a choice of plans.

The breadth of choice mattered as well as the number of options. A family choosing between two plans that both used gatekeepers and restricted provider access might not have meaningful choice in the way policy makers intended. According to HSC data, 49 percent of families offered employer insurance could choose between an HMO and a plan with fewer restrictions -- a measure of whether families had access to genuinely different types of coverage.

Variations in Plan Offerings

Plan choice varied by geography and employer size. In large metropolitan areas, about 70 percent of families offered employer coverage had a choice of plans. In smaller and nonmetropolitan areas, where the population could not support as many competing plans, only about 55 percent had that option.

Across the 12 HSC study sites, family plan choice ranged from about 61 percent in Little Rock and 62 percent in Greenville to 72 percent in Boston and 71 percent in Seattle. When the measure was narrowed to choice between an HMO and a less restrictive plan, the spread widened further: from 44 percent in Greenville to 61 percent in Orange County.

Firm size was a major determinant. Employees at firms with 50 or more workers were roughly twice as likely to have a choice of plans as those at smaller firms. Government employees were nearly three times as likely as small-firm workers to have plan options. Smaller employers faced higher per-employee administrative costs for offering choice, had less purchasing power, and often faced insurer requirements to contract with a single carrier to prevent adverse selection.

Trends in Plan Choice

Despite concerns that plan choice was declining, HSC data showed a modest two-percentage-point increase between the two survey rounds. While the number of traditional indemnity plans had been falling steadily since the 1980s, PPOs and point-of-service options had grown to fill some of that space.

Small metropolitan areas saw the largest gains, with plan choice increasing six percentage points. In moderate and large metropolitan areas, there was little to no change. The breadth of choice also expanded in smaller markets: the share of families in areas under 200,000 population who could choose between an HMO and another plan type rose from 30 percent to 37 percent. Metropolitan areas between 200,000 and one million population experienced a four-point gain.

The gains in small metro areas did not extend to employees of small firms, where the structural obstacles to offering choice persisted. In contrast, government workers and employees at large firms saw three-percentage-point increases in plan choice.

Policy Implications

While more families had choice than commonly believed, the level of choice was probably not sufficient to make health plans broadly responsive to consumer concerns. Significant disparities remained: families in rural and small metropolitan areas and employees at small firms were least likely to have plan options.

This divide drove the policy debate in two directions. Some policy makers, doubting that market forces could protect consumers who lacked plan choice, advocated direct regulation -- patient protection laws, the right to sue a health plan, and open-access mandates that would ensure provider continuity regardless of plan type. Others favored market solutions: creating local purchasing cooperatives ("health marts") to aggregate buying power for small firms and individuals, allowing individuals to buy into the Federal Employee Health Benefits Program, or even mandating that employers offer a choice of plans.

Each approach carried risks. A mandate to offer choice could lead some employers to stop offering insurance altogether. Purchasing cooperatives required sufficient enrollment to be viable. And regulatory protections, while helpful for consumers without choice, could increase costs and reduce plan flexibility. The data suggested that without some form of policy intervention -- whether regulatory or market-based -- most consumers would continue to have little voice in how the health care system evolved.

Data Sources

Data came from the 1996-1997 and 1998-1999 rounds of HSC's Community Tracking Study Household Survey, a nationally representative telephone survey supplemented by in-person interviews with households without telephones. Plan choice was estimated at the family level, accounting for options available through both spouses' employers.

Sources and Further Reading

Gawande, Atul A., et al., "Does Dissatisfaction with Health Plans Stem from Having No Choices?" Health Affairs, Vol. 17, No. 3 (September/October 1998).

Davis, Karen, et al., "Choice Matters: Enrollees Views of their Health Plans," Health Affairs, Vol. 14, No. 2 (Summer 1995).

Related HSC publications: "How Widespread Is Managed Competition?" Data Bulletin No. 12, Summer 1998; "Who Is Likely to Switch Health Plans?" Data Bulletin No. 18, July 2000; "Strong Opinions Held about the Tradeoff Between Choice of Providers and Cost of Care," Data Bulletin No. 04, Fall 1997.