Behavioral Hazard in Health Insurance
AbstractThis paper develops a model of health insurance that incorporates behavioral biases. In the traditional model, people who are insured overuse low value medical care because of moral hazard. There is ample evidence, though, of a different inefficiency: people underuse high value medical care because they make mistakes. Such “behavioral hazard” changes the fundamental tradeoff between insurance and incentives. With only moral hazard, raising copays increases the efficiency of demand by ameliorating overuse. With the addition of behavioral hazard, raising copays may reduce efficiency by exaggerating underuse. This means that estimating the demand response is no longer enough for setting optimal copays; the health response needs to be considered as well. This provides a theoretical foundation for value-based insurance design: for some high value treatments, for example, copays should be zero (or even negative). Empirically, this reinterpretation of demand proves important, since high value care is often as elastic as low value care. For example, calibration using data from a field experiment suggests that omitting behavioral hazard leads to welfare estimates that can be both wrong in sign and off by an order of magnitude. Optimally designed insurance can thus increase health care efficiency as well as provide financial protection, suggesting the potential for market failure when private insurers are not fully incentivized to counteract behavioral biases.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18468.
Date of creation: Oct 2012
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Find related papers by JEL classification:
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-27 (All new papers)
- NEP-CTA-2012-10-27 (Contract Theory & Applications)
- NEP-HEA-2012-10-27 (Health Economics)
- NEP-IAS-2012-10-27 (Insurance Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:CitEc Project, subscribe to its RSS feed for this item.
- Benjamin R. Handel & Jonathan T. Kolstad, 2013. "Health Insurance for “Humans”: Information Frictions, Plan Choice, and Consumer Welfare," NBER Working Papers 19373, National Bureau of Economic Research, Inc.
- Laurence Seidman, 2014. "Medicare For All: A Public Finance Analysis," Working Papers, University of Delaware, Department of Economics 14-02, University of Delaware, Department of Economics.
- Chandra, Amitabh & Gruber, Jonathan & McKnight, Robin, 2014. "The impact of patient cost-sharing on low-income populations: Evidence from Massachusetts," Journal of Health Economics, Elsevier, Elsevier, vol. 33(C), pages 57-66.
- Greg Fischer & Dean Karlan & Margaret McConnell & Pia Raffler, 2014. "To Charge or Not to Charge: Evidence from a Health Products Experiment in Uganda," Working Papers, Economic Growth Center, Yale University 1041, Economic Growth Center, Yale University.
- Greg Fischer & Dean Karlan & Margaret McConnell & Pia Raffler, 2014. "To Charge or Not to Charge: Evidence from a Health Products Experiment in Uganda," NBER Working Papers 20170, National Bureau of Economic Research, Inc.
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