Working Paper: NBER ID: w17802
Authors: Aviva Arondine; 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.
Keywords: Moral Hazard; Health Insurance; Forward Looking Behavior
JEL Codes: D12; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| future price of care (I11) | medical utilization (I18) |
| 10 cent increase in expected end-of-year price (E30) | initial medical utilization (I11) |
| join month (later in the year) (Y60) | initial medical care consumption (I11) |
| future price of medical care (I11) | individuals' medical utilization decisions (I18) |