Working Paper: NBER ID: w12972
Authors: 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.
Keywords: Health Insurance; Elderly; Cost-Sharing; Hospital Utilization
JEL Codes: I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased patient cost-sharing (G52) | Reduction in physician office visits (I11) |
| Increased patient cost-sharing (G52) | Reduction in prescription drug utilization (H51) |
| Increased patient cost-sharing (G52) | Increase in hospital utilization (I11) |
| Reduction in physician office visits (I11) | Increase in hospital utilization (I11) |
| Increased patient cost-sharing (G52) | Fiscal savings accrue to supplemental insurer (CalPERS) (G52) |
| Increased hospitalizations (I19) | Costs borne mostly by Medicare (H51) |