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Behavioral Hazard in Health Insurance

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  • Katherine Baicker
  • Sendhil Mullainathan
  • Joshua Schwartzstein

Abstract

A fundamental implication of standard moral hazard models is overuse of low-value medical care because copays are lower than costs. In these models, the demand curve alone can be used to make welfare statements, a fact relied on by much empirical work. There is ample evidence, though, that people misuse care for a different reason: mistakes, or "behavioral hazard." Much high-value care is underused even when patient costs are low, and some useless care is bought even when patients face the full cost. In the presence of behavioral hazard, welfare calculations using only the demand curve can be off by orders of magnitude or even be the wrong sign. We derive optimal copay formulas that incorporate both moral and behavioral hazard, providing a theoretical foundation for value-based insurance design and a way to interpret behavioral "nudges." Once behavioral hazard is taken into account, health insurance can do more than just provide financial protection—it can also improve health care efficiency. JEL Codes: D03, I12, I13, I30, I38.

Suggested Citation

  • Katherine Baicker & Sendhil Mullainathan & Joshua Schwartzstein, 2015. "Behavioral Hazard in Health Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 130(4), pages 1623-1667.
  • Handle: RePEc:oup:qjecon:v:130:y:2015:i:4:p:1623-1667
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    File URL: http://hdl.handle.net/10.1093/qje/qjv029
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    2. Zarek C. Brot-Goldberg & Amitabh Chandra & Benjamin R. Handel & Jonathan T. Kolstad, 2017. "What does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 132(3), pages 1261-1318.
    3. 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 1041, Economic Growth Center, Yale University.
    4. repec:aea:aejpol:v:9:y:2017:i:2:p:91-123 is not listed on IDEAS
    5. Laurence Seidman, 2014. "Medicare For All: A Public Finance Analysis," Working Papers 14-02, University of Delaware, Department of Economics.
    6. repec:eee:joecag:v:1-2:y:2013:i::p:83-89 is not listed on IDEAS
    7. Liran Einav & Amy Finkelstein & Maria Polyakova, 2016. "Private Provision of Social Insurance: Drug-specific Price Elasticities and Cost Sharing in Medicare Part D," NBER Working Papers 22277, National Bureau of Economic Research, Inc.
    8. Emmanuel Farhi & Xavier Gabaix, 2015. "Optimal Taxation with Behavioral Agents," Working Paper 305366, Harvard University OpenScholar.
    9. repec:eee:jhecon:v:57:y:2018:i:c:p:131-146 is not listed on IDEAS
    10. Marielle Non, 2017. "Co-payments in long-term home care: do they affect the use of care?," CPB Discussion Paper 363, CPB Netherlands Bureau for Economic Policy Analysis.
    11. Amy Finkelstein & Nathaniel Hendren & Mark Shepard, 2017. "Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts," NBER Working Papers 23668, National Bureau of Economic Research, Inc.
    12. Murooka, Takeshi & Schwarz, Marco A., 2018. "The timing of choice-enhancing policies," Journal of Public Economics, Elsevier, vol. 157(C), pages 27-40.
    13. repec:bla:ecinqu:v:55:y:2017:i:3:p:1452-1467 is not listed on IDEAS
    14. Chenyuan Liu & Justin R. Sydnor, 2018. "Dominated Options in Health-Insurance Plans," NBER Working Papers 24392, National Bureau of Economic Research, Inc.
    15. Leemore Dafny & Christopher Ody & Matt Schmitt, 2017. "When Discounts Raise Costs: The Effect of Copay Coupons on Generic Utilization," American Economic Journal: Economic Policy, American Economic Association, vol. 9(2), pages 91-123, May.
    16. Victor Stango & Joanne Yoong & Jonathan Zinman, 2017. "The Quest for Parsimony in Behavioral Economics: New Methods and Evidence on Three Fronts," NBER Working Papers 23057, National Bureau of Economic Research, Inc.
    17. Christina M. Dalton & Gautam Gowrisankaran & Robert Town, 2015. "Salience, Myopia, and Complex Dynamic Incentives: Evidence from Medicare Part D," NBER Working Papers 21104, National Bureau of Economic Research, Inc.
    18. Gerritsen, Aart, 2016. "Optimal taxation when people do not maximize well-being," Journal of Public Economics, Elsevier, vol. 144(C), pages 122-139.
    19. repec:aea:jecper:v:32:y:2018:i:1:p:155-78 is not listed on IDEAS
    20. 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, vol. 33(C), pages 57-66.
    21. Nathan Kettlewell, 2016. "Policy Choice and Product Bundling in a Complicated Health Insurance Market: Do People get it Right?," Discussion Papers 2016-16, School of Economics, The University of New South Wales.
    22. Saurabh Bhargava & George Loewenstein & Justin Sydnor, 2015. "Do Individuals Make Sensible Health Insurance Decisions? Evidence from a Menu with Dominated Options," NBER Working Papers 21160, National Bureau of Economic Research, Inc.
    23. 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.

    More about this item

    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

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