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Moral Hazard in Health Insurance: How Important Is Forward Looking Behavior?

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  • Aviva Aron-Dine
  • Liran Einav
  • Amy Finkelstein
  • Mark R. Cullen
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    Abstract

    We investigate whether individuals exhibit forward looking behavior in their response to the non-linear pricing common in health insurance contracts. Our empirical strategy exploits the fact that employees who join an employer-provided health insurance plan later in the calendar year face the same initial ("spot") price of medical care but a higher expected end-of-year ("future") price than employees who join the same plan earlier in the year. Our results reject the null of completely myopic behavior; medical utilization appears to respond to the future price, with a statistically significant elasticity of medical utilization with respect to the future price of -0.4 to -0.6. To try to quantify the extent of forward looking behavior, we develop a stylized dynamic model of individual behavior and calibrate it using our estimated behavioral response and additional data from the RAND Health Insurance Experiment. Our calibration suggests that the elasticity estimate may be substantially smaller than the one implied by fully forward-looking behavior, yet it is sufficiently high to have an economically significant effect on the response of annual medical utilization to a non-linear health insurance contract. Overall, our results point to the empirical importance of accounting for dynamic incentives in analyses of the impact of health insurance on medical utilization.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17802.

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    Date of creation: Feb 2012
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    Publication status: published as “Selection on Moral Hazard in Health Insurance,” with Amy Finkelstein, Stephen Ryan, Paul Schrimpf, and Mark Cullen, American Economic Review, 103(1), 178-219, February 2013.
    Handle: RePEc:nbr:nberwo:17802

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Amy Finkelstein & Sarah Taubman & Bill Wright & Mira Bernstein & Jonathan Gruber & Joseph P. Newhouse & Heidi Allen & Katherine Baicker & The Oregon Health Study Group, 2011. "The Oregon Health Insurance Experiment: Evidence from the First Year," NBER Working Papers, National Bureau of Economic Research, Inc 17190, National Bureau of Economic Research, Inc.
    2. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2009. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," NBER Working Papers, National Bureau of Economic Research, Inc 15617, National Bureau of Economic Research, Inc.
    3. Jeffrey B. Liebman & Erzo F.P. Luttmer, 2011. "Would People Behave Differently If They Better Understood Social Security? Evidence From a Field Experiment," NBER Working Papers, National Bureau of Economic Research, Inc 17287, National Bureau of Economic Research, Inc.
    4. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, American Economic Association, vol. 104(2), pages 537-63, February.
    5. Finkelstein, Amy & Luttmer, Erzo F. P. & Notowidigdo, Matthew J., 2008. "What Good Is Wealth without Health? The Effect of Health on the Marginal Utility of Consumption," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp08-036, Harvard University, John F. Kennedy School of Government.
    6. Gross, Tal & Notowidigdo, Matthew J., 2011. "Health insurance and the consumer bankruptcy decision: Evidence from expansions of Medicaid," Journal of Public Economics, Elsevier, Elsevier, vol. 95(7), pages 767-778.
    7. Manishi Prasad & Peter Wahlqvist & Rich Shikiar & Ya-Chen Tina Shih, 2004. "A," PharmacoEconomics, Springer Healthcare | Adis, Springer Healthcare | Adis, vol. 22(4), pages 225-244.
    8. Amanda E. Kowalski, 2012. "Estimating the Tradeoff Between Risk Protection and Moral Hazard with a Nonlinear Budget Set Model of Health Insurance," NBER Working Papers, National Bureau of Economic Research, Inc 18108, National Bureau of Economic Research, Inc.
    9. John Bailey Jones & Eric French, 2002. "On the Distribution and Dynamics of Health Costs," Discussion Papers, University at Albany, SUNY, Department of Economics 02-03, University at Albany, SUNY, Department of Economics.
    10. Amitabh Chandra & Jonathan Gruber & Robin McKnight, 2007. "Patient Cost-Sharing, Hospitalization Offsets, and the Design of Optimal Health Insurance for the Elderly," NBER Working Papers, National Bureau of Economic Research, Inc 12972, National Bureau of Economic Research, Inc.
    11. Naomi E. Feldman & Peter Katuscak, 2006. "Should the Average Tax Rate Be Marginalized?," CERGE-EI Working Papers, The Center for Economic Research and Graduate Education - Economic Institute, Prague wp304, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
    12. Cardon, James H & Hendel, Igal, 2001. "Asymmetric Information in Health Insurance: Evidence from the National Medical Expenditure Survey," RAND Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 32(3), pages 408-27, Autumn.
    13. Liran Einav & Amy Finkelstein & Stephen P. Ryan & Paul Schrimpf & Mark R. Cullen, 2011. "Selection on Moral Hazard in Health Insurance," NBER Working Papers, National Bureau of Economic Research, Inc 16969, National Bureau of Economic Research, Inc.
    14. Randall P. Ellis, 1986. "Rational Behavior in the Presence of Coverage Ceilings and Deductibles," RAND Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 17(2), pages 158-175, Summer.
    15. William Adams & Liran Einav & Jonathan Levin, 2007. "Liquidity Constraints and Imperfect Information in Subprime Lending," NBER Working Papers, National Bureau of Economic Research, Inc 13067, National Bureau of Economic Research, Inc.
    16. Keeler, Emmett B. & Rolph, John E., 1988. "The demand for episodes of treatment in the health insurance experiment," Journal of Health Economics, Elsevier, Elsevier, vol. 7(4), pages 337-367, December.
    17. Amanda E. Kowalski, 2009. "Censored Quantile Instrumental Variable Estimates of the Price Elasticity of Expenditure on Medical Care," NBER Working Papers, National Bureau of Economic Research, Inc 15085, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Amanda E. Kowalski, 2012. "Estimating the Tradeoff Between Risk Protection and Moral Hazard with a Nonlinear Budget Set Model of Health Insurance," NBER Working Papers, National Bureau of Economic Research, Inc 18108, National Bureau of Economic Research, Inc.
    2. Aviva Aron-Dine & Liran Einav & Amy Finkelstein, 2012. "The RAND Health Insurance Experiment, Three Decades Later," Discussion Papers, Stanford Institute for Economic Policy Research 12-007, Stanford Institute for Economic Policy Research.
    3. Helmut Farbmacher; & Joachim Winter, 2012. "Non-linear price schedules, demand for health care and response behavior," Health, Econometrics and Data Group (HEDG) Working Papers, HEDG, c/o Department of Economics, University of York 12/15, HEDG, c/o Department of Economics, University of York.
    4. Klein, T.J. & Lambertz, C. & Stahl, K., 2013. "Adverse Selection and Moral Hazard in Anonymous Markets," Discussion Paper, Tilburg University, Center for Economic Research 2013-032, Tilburg University, Center for Economic Research.
    5. Bernal, Noelia & Carpio, Miguel A. & Klein, Tobias J., 2014. "The Effects of Access to Health Insurance for Informally Employed Individuals in Peru," IZA Discussion Papers, Institute for the Study of Labor (IZA) 8213, Institute for the Study of Labor (IZA).
    6. Helmut Farbmacher & Peter Ihle & Ingrid Schubert & Joachim Winter & Amelie C. Wuppermann, 2013. "Heterogeneous Effects of a Nonlinear Price Schedule for Outpatient Care," CESifo Working Paper Series, CESifo Group Munich 4499, CESifo Group Munich.
    7. Aviva Aron-Dine & Liran Einav & Amy Finkelstein, 2012. "The RAND Health Insurance Experiment, Three Decades Later," NBER Working Papers, National Bureau of Economic Research, Inc 18642, National Bureau of Economic Research, Inc.
    8. Abe Dunn, 2014. "Health Insurance and the Demand for Medical Care: Instrumental Variable Estimates Using Health Insurer Claims Data," BEA Working Papers, Bureau of Economic Analysis 0107, Bureau of Economic Analysis.

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