Working Paper: NBER ID: w22802
Authors: Haizhen Lin; Daniel W. Sacks
Abstract: Nonlinear cost-sharing in health insurance encourages intertemporal substitution be- cause patients can reduce their out-of-pocket costs by concentrating spending in years when they hit the deductible. We test for such intertemporal substitution using data from the RAND Health Insurance Experiment, where people were randomly assigned either to a free care plan or to a cost-sharing plan which had coinsurance up to a maximum dollar expenditure (MDE). Hitting the MDE—leading to an effective price of zero—has a bigger effect on monthly health care spending and utilization than does being in free care, because people who hit the MDE face high future and past prices. As a result, we estimate that sensitivity to short-lasting price changes is about twice as large as sensitivity to long-lasting changes. These findings help reconcile conflicting estimates of the price elasticity of demand for health care, and suggest that high deductible health plans may be less effective than hoped in controlling health care spending.
Keywords: health care demand; intertemporal substitution; health insurance; cost-sharing; RAND Health Insurance Experiment
JEL Codes: D12; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Hitting the MDE (Y60) | Significant increase in health care spending (H51) |
| Hitting the MDE (Y60) | Sensitivity to short-lasting price changes (E30) |
| One-time unanticipated price decrease of 10 percentage points (D41) | Increases spending by 17% per month (D12) |
| Permanent price change (D41) | Increases spending by 7% (E62) |
| Hitting the deductible (G52) | Demand increases significantly (R22) |
| Demand increases significantly (R22) | No fewer acute health problems in the future (I14) |
| Intertemporal substitution (D15) | Retiming of care rather than reduction in overall health care needs (I11) |