Health Insurance Menu Design for Large Employers

We explore the challenges faced by a large employer designing a health insurance plan menu for its employees. Using detailed administrative data from Harvard University, we estimate a model of plan choice and utilization, and evaluate the benefits of cost sharing and plan variety. For a single plan with a generous out-of-pocket maximum, we find that modest cost sharing of approximately 30% maximizes average employee surplus. Further gains from offering choice are limited if based solely on financial dimensions, but can be economically significant if paired with other features that appeal to sicker households. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.