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Patient Cost-Sharing, Hospitalization Offsets, and the Design of Optimal Health Insurance for the Elderly

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  • Amitabh Chandra
  • Jonathan Gruber
  • Robin McKnight

Abstract

Patient cost-sharing for primary care and prescription drugs is designed to reduce the prevalence of moral hazard in medical utilization. Yet the success of this strategy depends on two factors: the elasticity of demand for those medical goods, and the risk of downstream hospitalizations by reducing access to beneficial health care. Surprisingly, we know little about either of these factors for the elderly, the most intensive consumers of health care in our country. We remedy both of these deficiencies by studying a policy change that raised patient cost-sharing for retired public employees in California. We find that physician office visits and prescription drug utilization are price sensitive, with implied arc-elasticities that are similar to those of the famous RAND Health Insurance Experiment (HIE). However, unlike the HIE, we find substantial “offset” effects in terms of increased hospital utilization in response to the combination of higher copayments for physicians and prescription drugs. These offset effects are concentrated in patients for whom medical care is presumably efficacious: those with a chronic disease. Finally, we find that the savings from increased cost-sharing accrue mostly to the supplemental insurer, while the costs of increased hospitalization accrue mostly to Medicare; thus, there is a fiscal externality associated with cost-sharing increases by supplemental insurers. Our findings suggest that health insurance should be tied to underlying health status, with chronically ill patients facing lower cost-sharing. We also conclude that the externalities to Medicare from supplemental insurance coverage may be more modest than previously suggested due to these offsets.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12972.

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Date of creation: Mar 2007
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Publication status: published as Chandra, Amitabh, Jonathan Gruber and Robin McKnight. “Patient Cost-Sharing and Hospitalization Offsets in the Elderly.” American Economic Review 100, 1 (March 2010): 193-213.
Handle: RePEc:nbr:nberwo:12972

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  1. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
  2. Dana Goldman & Tomas Philipson, 2007. "Integrated Insurance Design in the Presence of Multiple Medical Technologies," NBER Working Papers 12870, National Bureau of Economic Research, Inc.
  3. Lillard, L.A. & Rogowski, J., 1995. "Does Supplemental Private Insurance Increase Medicare Costs?," Papers, RAND - Labor and Population Program 95-16, RAND - Labor and Population Program.
  4. Lee A. Lillard & Jeannette Rogowski & Raynard Kington, 1999. "Insurance Coverage for Prescription Drugs: Effects on Use and Expenditures in the Medicare Population," Working Papers, RAND Corporation Publications Department 99-09, RAND Corporation Publications Department.
  5. Amy Finkelstein, 2007. "The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 122(1), pages 1-37, 02.
  6. Ettner, Susan L., 1997. "Adverse selection and the purchase of Medigap insurance by the elderly," Journal of Health Economics, Elsevier, Elsevier, vol. 16(5), pages 543-562, October.
  7. Hurd, Michael D. & McGarry, Kathleen, 1997. "Medical insurance and the use of health care services by the elderly," Journal of Health Economics, Elsevier, Elsevier, vol. 16(2), pages 129-154, April.
  8. Wolfe, John R. & Goddeeris, John H., 1991. "Adverse selection, moral hazard, and wealth effects in the medigap insurance market," Journal of Health Economics, Elsevier, Elsevier, vol. 10(4), pages 433-459.
  9. Rosett, Richard N & Huang, Lien-fu, 1973. "The Effect of Health Insurance on the Demand for Medical Care," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(2), pages 281-305, Part I, M.
  10. Feldstein, Martin S, 1971. "Hospital Cost Inflation: A Study of Nonprofit Price Dynamics," American Economic Review, American Economic Association, American Economic Association, vol. 61(5), pages 853-72, December.
  11. Manning, Willard G, et al, 1987. "Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, American Economic Association, vol. 77(3), pages 251-77, June.
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Cited by:
  1. Sara Allin & Jeremiah Hurley, 2008. "Inequity in Publicly Funded Physician Care: What Is The Role Of Private Prescription Drug Insurance?," Centre for Health Economics and Policy Analysis Working Paper Series, Centre for Health Economics and Policy Analysis (CHEPA), McMaster University, Hamilton, Canada 2008-02, Centre for Health Economics and Policy Analysis (CHEPA), McMaster University, Hamilton, Canada.
  2. William Encinosa & Didem Bernard & Avi Dor, 2010. "Does Prescription Drug Adherence Reduce Hospitalizations and Costs?," NBER Working Papers 15691, National Bureau of Economic Research, Inc.
  3. Schneider, Udo & Zerth, Jürgen, 2008. "Improving prevention compliance through appropriate incentives," MPRA Paper 8280, University Library of Munich, Germany.
  4. Gary V. Engelhardt & Jonathan Gruber, 2009. "Medicare Part D and the Financial Protection of the Elderly," Working Papers, Center for Retirement Research at Boston College, Center for Retirement Research wp2009-24, Center for Retirement Research, revised Oct 2009.
  5. Peter Neumann & Cayla Saret, 2014. "Is the US “leading from behind” on health policy?," The European Journal of Health Economics, Springer, Springer, vol. 15(2), pages 113-116, March.
  6. Finkelstein, Amy & McKnight, Robin, 2008. "What did Medicare do? The initial impact of Medicare on mortality and out of pocket medical spending," Journal of Public Economics, Elsevier, Elsevier, vol. 92(7), pages 1644-1668, July.
  7. Simonsen, Marianne & Skipper, Lars & Skipper, Niels, 2010. "Price Sensitivity of Demand for Prescription Drugs: Exploiting a Regression Kink Design," Working Papers, University of Aarhus, Aarhus School of Business, Department of Economics 10-1, University of Aarhus, Aarhus School of Business, Department of Economics.
  8. Aviva Aron-Dine & Liran Einav & Amy Finkelstein & Mark Cullen, 2012. "Moral hazard in health insurance: How important is forward looking behavior?," Discussion Papers, Stanford Institute for Economic Policy Research 11-007, Stanford Institute for Economic Policy Research.
  9. Darius Lakdawalla & Neeraj Sood, 2007. "The Welfare Effects of Public Drug Insurance," NBER Working Papers 13501, National Bureau of Economic Research, Inc.
  10. Mark Duggan & Patrick Healy & Fiona Scott Morton, 2008. "Providing Prescription Drug Coverage to the Elderly: America's Experiment with Medicare Part D," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 22(4), pages 69-92, Fall.
  11. Omar Paccagnella & Vincenzo Rebba & Guglielmo Weber, 2013. "VOLUNTARY PRIVATE HEALTH INSURANCE AMONG THE OVER 50s IN EUROPE," Health Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 22(3), pages 289-315, 03.
  12. Alan M. Garber & Jonathan Skinner, 2008. "Is American Health Care Uniquely Inefficient?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 22(4), pages 27-50, Fall.
  13. William Encinosa, 2009. "Value-based insurance design in medicare," Applied Health Economics and Health Policy, Springer, Springer, vol. 7(3), pages 149-154, September.
  14. Aviva Aron-Dine & Liran Einav & Amy Finkelstein & Mark R. Cullen, 2012. "Moral Hazard in Health Insurance: How Important Is Forward Looking Behavior?," NBER Working Papers 17802, National Bureau of Economic Research, Inc.
  15. Gary V. Engelhardt & Jonathan Gruber, 2010. "Medicare Part D and the Financial Protection of the Elderly," NBER Working Papers 16155, National Bureau of Economic Research, Inc.

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