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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.

Suggested Citation

  • 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 12972, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12972
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    Cited by:

    1. 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, vol. 92(7), pages 1644-1668, July.
    2. 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 wp2009-24, Center for Retirement Research, revised Oct 2009.
    3. Marianne Simonsen & Lars Skipper & Niels Skipper, 2016. "Price Sensitivity of Demand for Prescription Drugs: Exploiting a Regression Kink Design," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(2), pages 320-337, March.
    4. Alan M. Garber & Jonathan Skinner, 2008. "Is American Health Care Uniquely Inefficient?," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 27-50, Fall.
    5. Sara Allin & Jeremiah Hurley, 2009. "Inequity in publicly funded physician care: what is the role of private prescription drug insurance?," Health Economics, John Wiley & Sons, Ltd., vol. 18(10), pages 1218-1232.
    6. Darius Lakdawalla & Neeraj Sood, 2007. "The Welfare Effects of Public Drug Insurance," NBER Working Papers 13501, National Bureau of Economic Research, Inc.
    7. 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.
    8. Nicolas Ziebarth, 2014. "Assessing the effectiveness of health care cost containment measures: evidence from the market for rehabilitation care," International Journal of Health Economics and Management, Springer, vol. 14(1), pages 41-67, March.
    9. 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.
    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, vol. 22(4), pages 69-92, Fall.
    11. William Encinosa, 2009. "Value-based insurance design in medicare," Applied Health Economics and Health Policy, Springer, vol. 7(3), pages 149-154, September.
    12. 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.
    13. Omar Paccagnella & Vincenzo Rebba & Guglielmo Weber, 2013. "VOLUNTARY PRIVATE HEALTH INSURANCE AMONG THE OVER 50s IN EUROPE," Health Economics, John Wiley & Sons, Ltd., vol. 22(3), pages 289-315, March.
    14. Law, Michael R. & Grépin, Karen A., 2010. "Is newer always better? Re-evaluating the benefits of newer pharmaceuticals," Journal of Health Economics, Elsevier, vol. 29(5), pages 743-750, September.
    15. Peter Neumann & Cayla Saret, 2014. "Is the US “leading from behind” on health policy?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 15(2), pages 113-116, March.
    16. Schneider, Udo & Zerth, Jürgen, 2008. "Improving prevention compliance through appropriate incentives," MPRA Paper 8280, University Library of Munich, Germany.
    17. Robert Kaestner & Nasreen Khan, 2010. "Medicare Part D and its Effect on the Use of Prescription Drugs, Use of Other Health Care Services and Health of the Elderly," NBER Working Papers 16011, National Bureau of Economic Research, Inc.
    18. repec:eee:jhecon:v:59:y:2018:i:c:p:109-124 is not listed on IDEAS

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    JEL classification:

    • I1 - Health, Education, and Welfare - - Health

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