Using a unique panel dataset of health plan choices and personal characteristics of employees at a single firm, this paper provides estimates of price elasticities for health insurance plans in a managed competition setting. Estimated price elasticities are larger in absolute value than most previous estimates and the magnitude of the price elasticity suggests that there is a place for price competition in this market. We also find evidence of transition costs in switching health plans for older and less healthy employees. Such differential responses to price may contribute to adverse selection in this market.

Anne Beeson Royalty is an assistant professor of economics at Stanford University. Neil Solomon  participated in the survey research while he was a Robert Wood Johnson clinical scholar in the Department of Medicine at Stanford University. He is now a Utilization Specialist at Permanente Interregional Consultants, Kaiser Permanente. The authors thank Laurence Baker, Alain Enthove, Anjini Kochar, Tom MaCurdy, Julie Schaffner, Sara Singer, Joanne Spetz, workshop participants at Yale and the Public Policy Institute of California, and two anonymous referees for useful comments on previous drafts of the paper. They also gratefully acknowledge the cooperation of Jim Franklin, Karin Taber, and Elise Watzka of the Stanford Office of Total Compensation in providing data for this paper, the excellent research assistance of Marc Spear, and financial support from the Center for Economic Policy Research at Stanford and the Kaiser Family Foundation. The data for this article are available from Anne Beeson Royalty, Department of Economics, Stanford University, Stanford, CA 94305-6072, (royalty@leland.stanford.edu) from May 1999 through April 2002.