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The Liquidity Sensitivity of Healthcare Consumption: Evidence from Social Security Payments

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  • Tal Gross
  • Timothy Layton
  • Daniel Prinz

Abstract

Some consumers lack the cash needed to pay for medical care. As a result, they either delay care until they can pay for it or they forgo the care altogether. To test for such a possibility, we study the distribution of monthly Social Security checks among Medicare Part D enrollees. When Social Security checks are distributed, prescription fills increase by 6-12 percent. In that sense, drug consumption of low-income Medicare recipients is "liquidity sensitive." We then study recipients who transition onto a program that eliminates copayments. When those recipients do not face copayments, their drug consumption becomes less liquidity sensitive. That finding implies that, beyond risk protection, generous insurance also provides recipients with the ability to consume healthcare when they need it rather than when they have cash. Further, we find that recipients whose drug consumption is most liquidity sensitive exhibit price elasticities of demand that are twice the size of the average elasticity, suggesting that more-generous insurance causes recipients both to re-time prescription filling and also to start filling prescriptions that they otherwise would not fill. We present a stylized model that uses this finding to call into question the conventional interpretation of demand-response to price as solely inefficient moral hazard.

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  • Tal Gross & Timothy Layton & Daniel Prinz, 2020. "The Liquidity Sensitivity of Healthcare Consumption: Evidence from Social Security Payments," NBER Working Papers 27977, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:27977
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    More about this item

    JEL classification:

    • G5 - Financial Economics - - Household Finance
    • H0 - Public Economics - - General
    • I1 - Health, Education, and Welfare - - Health
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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