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Rational Behavior in the Presence of Coverage Ceilings and Deductibles

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  • Randall P. Ellis

Abstract

Consumers of health care services with insurance plan features such as deductibles, copayments, and coverage ceilings, in which the price of health care depends upon expenditures accumulated during a single year, should rationally anticipate the impact of current consumption decisions on the price of health care later in the year. We show that in the absence of wealth effects and risk aversion, a utility-maximizing consumer should base current consumption decisions on the expected end-of-year price of health care. In a specific model with risk aversion and lumpy consumption decisions we show that the expected end-of-year price remains close to the true shadow price of health care for plausible insurance plan and demand parameters. We use this result in an econometric model of the demand for ambulatory mental health services.

Suggested Citation

  • Randall P. Ellis, 1986. "Rational Behavior in the Presence of Coverage Ceilings and Deductibles," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 158-175, Summer.
  • Handle: RePEc:rje:randje:v:17:y:1986:i:summer:p:158-175
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    Cited by:

    1. Paul Contoyannis & Jeremiah Hurley & Paul Grootendorst & Sung-Hee Jeon & Robyn Tamblyn, 2005. "Estimating the price elasticity of expenditure for prescription drugs in the presence of non-linear price schedules: an illustration from Quebec, Canada," Health Economics, John Wiley & Sons, Ltd., vol. 14(9), pages 909-923.
    2. Kairies-Schwarz, Nadja & Harrison, Glenn W. & Han, Johann, 2018. "Deductibles and Health Care Utilization: An Experiment on the Role of Forward-Looking Behavior," Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181588, Verein für Socialpolitik / German Economic Association.
    3. repec:ucp:amjhec:v:2:y:2016:i:4:p:399-430 is not listed on IDEAS
    4. Kyoungrae Jung & Roger Feldman & A. McBean, 2014. "Demand for prescription drugs under non-linear pricing in Medicare Part D," International Journal of Health Economics and Management, Springer, vol. 14(1), pages 19-40, March.
    5. Chad D. Meyerhoefer & Samuel H. Zuvekas, 2010. "New estimates of the demand for physical and mental health treatment," Health Economics, John Wiley & Sons, Ltd., vol. 19(3), pages 297-315.
    6. repec:eee:jhecon:v:61:y:2018:i:c:p:27-46 is not listed on IDEAS
    7. Stefan Boes & Michael Gerfin, 2016. "Does Full Insurance Increase the Demand for Health Care?," Health Economics, John Wiley & Sons, Ltd., vol. 25(11), pages 1483-1496, November.
    8. Kowalski, Amanda E., 2015. "Estimating the tradeoff between risk protection and moral hazard with a nonlinear budget set model of health insurance," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 122-135.
    9. Paul Grootendorst, 2012. "Prescription Drug Insurance and Reimbursement," Chapters, in: Andrew M. Jones (ed.), The Elgar Companion to Health Economics, Second Edition, chapter 11, Edward Elgar Publishing.
    10. Westerhout, Ed & Folmer, Kees, 2018. "The Effects of Capping Co-Insurance Payments," Discussion Paper 2018-050, Tilburg University, Center for Economic Research.
    11. Helmut Farbmacher & Peter Ihle & Ingrid Schubert & Joachim Winter & Amelie Wuppermann, 2017. "Heterogeneous Effects of a Nonlinear Price Schedule for Outpatient Care," Health Economics, John Wiley & Sons, Ltd., vol. 26(10), pages 1234-1248, October.
    12. Hayen, Arthur & Klein, Tobias & Salm, Martin, 2018. "Does the framing of patient cost-sharing incentives matter? The effects of deductibles vs. no-claim refunds," CEPR Discussion Papers 12908, C.E.P.R. Discussion Papers.
    13. Bakker, Frank M. & van Vliet, Rene C. J. A. & van de Ven, Wynand P. M. M., 2000. "Deductibles in health insurance: can the actuarially fair premium reduction exceed the deductible?," Health Policy, Elsevier, vol. 53(2), pages 123-141, September.
    14. Ed Westerhout & Kees Folmer, 2013. "Why it may hurt to be insured: the effects of capping coinsurance payments," CPB Discussion Paper 239, CPB Netherlands Bureau for Economic Policy Analysis.
    15. Helmut Farbmacher & Peter Ihle & Ingrid Schubert & Joachim Winter & Amelie Wuppermann, 2017. "Heterogeneous Effects of a Nonlinear Price Schedule for Outpatient Care," Health Economics, John Wiley & Sons, Ltd., vol. 26(10), pages 1234-1248, October.
    16. 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.
    17. repec:spr:eujhec:v:18:y:2017:i:6:d:10.1007_s10198-016-0827-9 is not listed on IDEAS
    18. repec:eee:pubeco:v:175:y:2019:i:c:p:29-43 is not listed on IDEAS
    19. repec:eee:jhecon:v:55:y:2017:i:c:p:232-243 is not listed on IDEAS
    20. Haizhen Lin & Daniel W. Sacks, 2016. "Intertemporal Substitution in Health Care Demand: Evidence from the RAND Health Insurance Experiment," NBER Working Papers 22802, National Bureau of Economic Research, Inc.
    21. Randall P. Ellis & Wenjia Zhu, 2016. "Health Plan Type Variations in Spells of Health-Care Treatment," American Journal of Health Economics, MIT Press, vol. 2(4), pages 399-430, Fall.

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