A Structural Model of Health Plan Choice and Health Care Demand in the Medicare Managed Care Program

I examine the joint determination of health plan choice and subsequent health care utilization in the Medicare managed care and supplemental insurance markets. The objectives are to evaluate the welfare impact of the Medicare managed care program taking into account the effect of endogenous selection, and to advance the applied literature on health plan choice and health care demand. Standard models of insurance markets suggest that Medicare Advantage will have ambiguous welfare implications because of endogenous selection. While previous research has found evidence that Medicare Advantage plans experience favorable selection, this research is, to my knowledge, the first to consider the welfare impact. In the model, beneficiaries choose health plans by taking expectations of indirect utilities over a known distribution of health states. Health care utilization is simultaneously determined in five dimensions: inpatient care, outpatient care, doctor visits, prescription drugs, and dental care. The plan choice and utilization models are stochastically dependent. The demand model accounts for uncertainty about the efficacy of treatment, substitutability across types of treatment, diminishing marginal product both intensively and extensively, and limits on the efficacy of treatment. To estimate the model, I use health plan choice data at both aggregate and individual levels as well as individual level data on subsequent utilization. The aggregate health plan choice data is observed at the county/age/gender level. I also observe counties of operation and health plan characteristics of all Medicare managed care organizations and data on county level Medigap premiums. JEL Classification: C34, H51, I10, I18