Switching Costs in Health Insurance

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 09.10.2018, 12:15 - 13:30


Presentation by 

Gordon B. Dahl (University of California, San Diego)


Switching costs in U.S. health insurance markets arise from three difficult to disentangle sources: attachment to one’s existing doctors, inertia/inattention and the option value of a larger network. We exploit a quasi-experiment within the University of California system which introduced a new health plan that allowed some employees to keep their doctors without a rise in premiums, while others faced up to a $1,800 per annum increase. No other plan characteristics changed for either of the two groups, which allows us to separately identify doctor attachment from inertia and option value. We estimate that when the new health plan is introduced, (i) 22% of employees exhibit inertia, (ii) 33% are willing to pay a higher premium to keep their doctors and (iii) the option value of a large versus very large network is close to zero. Switching costs vary by income, age, gender, family composition and prior health care utilization patterns. In particular, we find that sicker and older individuals have less inertia but place a greater value on keeping their doctors. While other papers have documented inertia in insurance choices, this work is the first to separate out doctor switching costs. Our findings have implications for the design of health insurance markets and for competition among complex products when consumers exhibit inertia.

For more information, please contact seminar@iza.org