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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

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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  • 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.
  • Handle: RePEc:nbr:nberwo:17802 Note: AG HC IO PE
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Tobias J. Klein & Christian Lambertz & Konrad O. Stahl, 2016. "Market Transparency, Adverse Selection, and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 124(6), pages 1677-1713.
    3. Klein, Tobias & Lambertz, Christian & Stahl, Konrad, 2013. "Adverse Selection and Moral Hazard in Anonymous Markets," CEPR Discussion Papers 9501, C.E.P.R. Discussion Papers.
    4. Dalton, Christina M., 2014. "Estimating demand elasticities using nonlinear pricing," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 178-191.
    5. Aviva Aron-Dine & Liran Einav & Amy Finkelstein, 2013. "The RAND Health Insurance Experiment, Three Decades Later," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 197-222, Winter.
    6. Bernal Lobato, N., 2014. "Essays in applied microeconomics," Other publications TiSEM 9b638b3d-2f83-452a-b2c8-c, Tilburg University, School of Economics and Management.
    7. Patrick Bajari & Chenghuan Sean Chu & Denis Nekipelov & Minjung Park, 2013. "A Dynamic Model of Subprime Mortgage Default: Estimation and Policy Implications," NBER Working Papers 18850, National Bureau of Economic Research, Inc.
    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. Fukushima, Kazuya & Mizuoka, Sou & Yamamoto, Shunsuke & Iizuka, Toshiaki, 2016. "Patient cost sharing and medical expenditures for the Elderly," Journal of Health Economics, Elsevier, vol. 45(C), pages 115-130.
    10. David Autor & Mark Duggan & Jonathan Gruber, 2014. "Moral Hazard and Claims Deterrence in Private Disability Insurance," American Economic Journal: Applied Economics, American Economic Association, vol. 6(4), pages 110-141, October.
    11. repec:eee:pubeco:v:154:y:2017:i:c:p:122-136 is not listed on IDEAS
    12. Abe Dunn, 2014. "Health Insurance and the Demand for Medical Care: Instrumental Variable Estimates Using Health Insurer Claims Data," BEA Working Papers 0107, Bureau of Economic Analysis.
    13. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, vol. 104(2), pages 537-563, February.
    14. 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 4499, CESifo Group Munich.
    15. Stefan Pichler & Jan Ruffner, 2016. "Does it really make a difference? Health care utilization with two high deductible health care plans," KOF Working papers 16-404, KOF Swiss Economic Institute, ETH Zurich.
    16. Bernal, Noelia & Carpio, Miguel A. & Klein, Tobias J., 2017. "The effects of access to health insurance: Evidence from a regression discontinuity design in Peru," Journal of Public Economics, Elsevier, vol. 154(C), pages 122-136.
    17. Amitabh Chandra & Jonathan Holmes & Jonathan Skinner, 2013. "Is This Time Different? The Slowdown in Healthcare Spending," NBER Working Papers 19700, National Bureau of Economic Research, Inc.
    18. Helmut Farbmacher; & Joachim Winter, 2012. "Non-linear price schedules, demand for health care and response behavior," Health, Econometrics and Data Group (HEDG) Working Papers 12/15, HEDG, c/o Department of Economics, University of York.
    19. Dunn, Abe, 2016. "Health insurance and the demand for medical care: Instrumental variable estimates using health insurer claims data," Journal of Health Economics, Elsevier, vol. 48(C), pages 74-88.
    20. Sood Neeraj & Wagner Zachary & Huckfeldt Peter & Haviland Amelia M., 2013. "Price Shopping in Consumer-Directed Health Plans," Forum for Health Economics & Policy, De Gruyter, vol. 16(1), pages 1-19, March.
    21. 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:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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