Working Paper: NBER ID: w23846
Authors: Rudy Douven; Ron van der Heijden; Thomas McGuire; Frederik T. Schut
Abstract: In health care systems with a competitive health insurance market, governments or other sponsors (e.g. employers) often subsidize premiums to encourage enrolment. These subsidies are typically independent of plan choice leaving the absolute premium differences in place so as not to distort consumer choice of plan. Such subsidies do, however, change the relative premium differences across plans, which, according to theories from behavioral economics, can affect choice. Consumers might be sensitive to differences relative to a reference premium (“relative thinking”). Furthermore, consumers might be particularly sensitive to a reference premium of zero (“zero-price effect”), a relevant range for some subsidized health insurance markets. This paper tests these ideas with two sources of evidence. We argue that observed equilibria in Germany and the U.S. Medicare Advantage markets are consistent with a powerful zero-price effect, resulting in an equilibrium focal pricing at zero. This contrasts with the Netherlands where equilibrium premiums are well above zero. In an empirical test using hypothetical questions in a web-based survey in these three countries, we also find evidence for both a relative thinking and a zero-price effect in the demand for health insurance. Our findings imply that well-designed subsidies can leverage relative thinking to increase demand elasticity for health plans. Creation of a powerful reference price (e.g., at zero), however, risks subverting price competition.
Keywords: Health Insurance; Behavioral Economics; Zero-Price Effect; Relative Thinking
JEL Codes: I13; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| zero-price effect (D41) | higher demand for health plans priced at zero (G52) |
| relative thinking (D91) | demand elasticity (D12) |
| zero-price reference (D41) | significant increase in switching probabilities (C69) |
| well-designed subsidies (H23) | enhance demand elasticity for health plans (G52) |
| lower reference premium (G22) | increased willingness to switch plans (D16) |