1. Age and Choice in Health Insurance: Evidence from Switzerland Karolin Becker und Peter Zweifel Socioeconomic Institute, University of Zurich pzweifel@soi.unizh.ch ARIA Annual Meeting Washington DC, 6-9 August, 2006

2. Socioeconomic Institute University of Zürich Motivation Rising health care expenditure due to more ample coverage in compulsory health insurance  higher premiums for health insurance Expansion of benefits in1996  increasing welfare loss due to uniformity in the presence of preference heterogeneity (Cutler and Zeckhauser, 1997) Political debate focuses on the cost side. Here, issues relate to the benefit side:...what is the compensation asked by Swiss consumers for accepting more stingy contracts?... Will such new options not be rejected by the elderly in particular?

3. Socioeconomic Institute University of Zürich Age and Choice Behavior 3 Hypotheses H1: increased variance in asset "health" caused by health problems  demand for comprehensive coverage increases with age (Arrow, 1973) H2: demand for health insurance follows the value of life over the life cycle  demand for coverage decreases beyond the age of ca. 40 (Shepard and Zeckhauser, 1984) H3: transition to retirement causes transitory reduction in variance of "health" and in value of life  demand for coverage decreases

4. Socioeconomic Institute University of Zürich Discrete Choice Experiments (1) Allows individuals to express preferences for non- marketed goods Is based on the Random Utility Model (Luce, 1959; Manski and Lerman 1977; McFadden, 1973 and 2001) –individuals choose alternative with the highest utility (hypothetical choice) –choices are deterministic, but the researcher cannot observe all determinants of utility

5. Socioeconomic Institute University of Zürich Discrete Choice Experiments (2) Comparison of utility values determined by indirect utility function (i=individual, j=product alternative) choice between alternatives j and decomposition into a stochastic and a deterministic part

6. Socioeconomic Institute University of Zürich Setup of the Study (1) Sample of 1000 Swiss residents (older than 24) Telephone survey (two contacts) –questions on utilization of the health system and socioeconomic variables –DCE: 10 choices per individual (status quo vs hypothetical alternative) Attributes considered: –annual deductible (deduct) –copayment rate (copay) –alternative treatment methods (altmed) –list of medications (generics) –restricted access to innovations (innovation) –monthly premium per capita (premium)

7. Socioeconomic Institute University of Zürich Setup of the Study (2) Which of these contracts would you choose? premium reduction - CHF 50premium: CHF 290/month This alternative contract My current contract  access to innovative treatments with delay of 2 years innovation (status quo) status quogenerics (status quo) fewer treatments are coveredalternative medicine (status quo) copayment: 10% deductible: CHF 1500 ($1155)deductible: CHF 230 ($177) alternative contractstatus quo insurance contract example of a choice card

8. Socioeconomic Institute University of Zürich Estimation strategy Random-effects Probit specification Model 1: Serves to check for the relevance of attributes Model 2: Designed to capture age-specific effects simple model, only product attributes included controlling for all relevant socioeconomic variables (interaction terms)

9. Socioeconomic Institute University of Zürich Results Derive marginal willingness-to-pay (WTP) for Model 1 marginal WTP (in CHF) standard errors (bootstrapped) deductible-0.032050.01099 copayment-18.913.30448 alt.med. (+coverage) 12.363.01507 generics-13.773.14571 innovation-38.393.36486

10. Socioeconomic Institute University of Zürich Table 1a: Random-effects Probit estimation results (selected interactions) coefficients.e. zvalue deduct-0.000850.00012-6.87 deduct 2 1.12e-073.17e-083.53 copay-0.337440.18329-1.87 alt.med.0.283990.183381.55 generics-0.076290.17453-0.44 innovation-0.004880.21739-0.02 premium-0.015080.00273-5.53 constant-0.873950.23906-3.66  =0.91*,  = 0.45* Log likelihood: -2964 n=9,334

11. Socioeconomic Institute University of Zürich 1.930.000100.00020deduct*a63 + 3.210.092770.29779copay*notreat -2.050.11262-0.23113innov*a2539 2.190.113080.24711innov*french -1.820.08891-0.16156altmed*sexm 1.970.133800.26306copay*a63 + -2.167.51e-09-1.63e-08deduct 2 *hhsize -2.540.00011-0.00027deduct*poor 3.070.000090.00028deduct*rich 2.340.000060.00015deduct*sexm zvalue s.e. coefficient Table 1b: Random-effects Probit estimation results (selected interactions)

12. Socioeconomic Institute University of Zürich 2.970.001830.00543prem*a63 + -0.810.13653-0.10998rich 0.170.057810.00957hhsize -1.490.12322-0.18403notreat 0.280.209560.05966poor -2.630.17655-0.46353a63 + 0.980.133520.13103a2539 -0.420.13744-0.05830sex 1.530.001410.00215prem*french -2.290.00141-0.00322prem*a2539 zvalue s.e. coefficient Table 1c: Random-effects Probit estimation results (selected interactions)

13. Socioeconomic Institute University of Zürich WTP for age groups (all interaction terms) - evaluated at the median individual of each subgroup marg. WTP 25-39marg. WTP 40-62marg. WTP 63+ deduct-0.06 (0.04) deduct-0.05 (0.02) deduct-0.03 (0.01) copay-16.64 (16.00) copay-30.36 (12.31) copay-8.24 (6.96) alt.med (+) 67.51 (44.88) alt.med (+) 19.95 (10.60) alt.med (+) 0.77 (6.38) generics-31.77 (22.00) generics-13.81 (9.57) generics-8.91 (6.90) Innov.-54.12 (35.41) innov.-25.50 (11.57) innov.-14.10 (8.34)

14. Socioeconomic Institute University of Zürich Age-specific results Compensation demanded for a 20% copayment (status quo 10%) Compensation demanded for delayed access to innovations (3 yrs)

15. Socioeconomic Institute University of Zürich Conclusion (1) 3 Hypotheses with respect to age H1:increased asset variance  demand for coverage increases with age H2:demand follows the value of life  demand for coverage decreases with age H3:transition to retirement  demand for coverage temporarily decreases with age H1 cannot be confirmed (contrary to popular belief) H2 and H3 tend to be confirmed for the median individual

16. Socioeconomic Institute University of Zürich Conclusion (2) Estimation results for socioeconomic groups indicate preference heterogeneity  Uniform insurance contracts cause a welfare loss Contracts with certain restrictions and lower premiums might be attractive also for the elderly, affording them a utility gain

17. Socioeconomic Institute University of Zürich Links SOI-Working Paper: http://www.soi.unizh.ch/research/wp/wp0410.pdf http://www.soi.unizh.ch/research/wp/wp0410.pdf Study Report (German): http://www.soi.unizh.ch/staff/becker/becker- zweifel_summary.pdf

18. Socioeconomic Institute University of Zürich References (1) Arrow, K. (1971), Alternative approaches to the theory of choice in risk-taking situations, in: Arrow, K., Essays in the Theory of Risk-bearing, Amsterdam: North-Holland, 1-44. Ben-Akiva, M. and S.R. Lerman (1985), Discrete Choice Analysis, Cambridge: The MIT Press. Felder, S. (1997), Costs of dying: alternatives to rationing, Health Policy, 39: 167-176. Louvière, J.L., Hensher, D.A. and J.D. Swait (2000), Stated Choice Methods. Analysis and Applications, Cambridge: University Press. Luce, D. R. (1959), Individual Choice Behaviour, New York: Wiley and Sons. Manski, C. and S.R. Lerman(1977), The estimation of choice probabilities from choice based samples, Econometrica, 45(8): 1977-88.

19. Socioeconomic Institute University of Zürich References (2) McFadden (2000), Economic Choices, AER, 91(3): 351-378. Ryan, M. and K. Gerard (2003), Using discrete choices experiments to value health care programmes: current practice and future reflections, Applied Health Economics and Health Policy, 2(1): 55-64. Samuelson, W. and R.J. Zeckhauser (1988), Status quo bias in decision making, Journal of Risk and Uncertainty, 1: 7-59. Shepard, D.S. and R.J. Zeckhauser (1984), Survival and consumption, Management Science, 30(4): 423-439. Telser H. et al. (2004), Was leistet unser Gesundheitswesen?, Schlussbericht, Bern.