Consumers' Sensitivity to Health Plan Premiums: Evidence From a Natural Experiment in California

A recent policy change by the University of California (UC) provides a unique natural experiment for investigating how consumers respond to financial incentives when choosing health plans. In 1994 UC went from a premium contribution policy that subsidized more costly plans to a policy of contributing a constant dollar amount. As a result, employee premium contributions increased for roughly one-third of university employees. The response to this change in relative prices was strong. Whereas only 5 percent of employees facing constant premium contributions switched plans, roughly one-quarter of those facing premium contribution increases of less than $10 per month switched to lower-cost plans. Higher price increases led to even greater rates of plan switching.