We estimate how cost sharing, the portion of the bill the patient pays, affects the demand for medical services. The data come from a randomized experiment. A catastrophic insurance plan reduces expenditures 31 percent relative to zero out-of-pocket price. The price elasticity is approximately -0.2. We reject the hypothesis that less favorable coverage of outpatient services increases total expenditure (for example, by deterring preventive care or inducing hospitalization).

/pdf/health-insurance-and-the-demand-for-medical-care-evidence-13gpg9hn2l.pdf

Health insurance and the demand for medical care: evidence from a randomized experiment.

Hardly a week goes by without a front-page newspaper article on rising health care costs and the uninsured. In this article, I focus mainly on costs, arguing that the issue has been somewhat misconceived: while the level of medical care spending in the U.S. is a cause for concern, the welfare losses associated with rises in that level of spending may not be as large as the public rhetoric can make them seem. In fact, cost containment may not be as urgent as is widely supposed, and some proposed "cost containment" policies may result in welfare losses for the insured and even increase the number of uninsured

https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.6.3.3

Medical care costs: how much welfare loss?

In health economics applications involving outcomes (y) and covariates (x), it is often the case that the central inferential problems of interest involve E[y|x] and its associated partial effects or elasticities. Many such outcomes have two fundamental statistical properties: yo0; and the outcome y=0 is observed with sufficient frequency that the zeros cannot be ignored econometrically. Common approaches to estimation in such instances include Tobit, selection, and two-part models. This paper (1) describes circumstances where the standard two-part model with homoskedastic retransformation will fail to provide consistent inferences about important policy parameters; and (2) demonstrates some alternative approaches that are likely to prove helpful in applications.

Much Ado About Two: Reconsidering Retransformation and the Two-Part Model in Health Economics

https://www.nber.org/system/files/working_papers/t0228/t0228.pdf

Much ado about two: reconsidering retransformation and the two-part model in health econometrics

This article describes the anatomy of health insurance. It begins by considering the optimal design of health insurance policies. Such policies must make tradeoffs appropriately between risk sharing on the one hand and agency problems such as moral hazard (the incentive of people to seek more care when they are insured) and supplier-induced demand (the incentive of physicians to provide more care when they are well reimbursed) on the other. Optimal coinsurance arrangements make patients pay for care up to the point where the marginal gains from less risk sharing are just offset by the marginal benefits from reduced provision of low valued care. Empirical evidence shows that both moral hazard and demand-inducement are quantitatively important. Coinsurance based on expenditure is a crude control mechanism. Moreover, it places no direct incentives on physicians, who are responsible for most expenditure decisions. To place such incentives on physicians is the goal of supply-side cost containment measures, such as utilization review and capitation. This goal motivates the surge in managed care in the United States, which unites the functions of insurance and provision, and allows for active management of the care that is delivered. The analysis then turns to the operation of health insurance markets. Economists generally favor choice in health insurance for the same reasons they favor choice in other markets: choice allows people to opt for the plan that is best for them and encourages plans to provide services efficiently. But choice in health insurance is a mixed blessing because of adverse selection – the tendency of the sick to choose more generous insurance than the healthy. When sick and healthy enroll in different plans, plans disproportionately composed of poor risks have to charge more than they would if they insured an average mix of people. The resulting high premiums create two adverse effects: they discourage those who are healthier but would prefer generous care from enrolling in those plans (because the premiums are so high), and they encourage plans to adopt measures that deter the sick from enrolling (to reduce their overall costs). The welfare losses from adverse selection are large in practice. Added to them are further losses from premiums that vary with observable health status. Because insurance is contracted for annually, people are denied a valuable form of intertemporal insurance – the right to buy health coverage at average rates in the future should they get sick today. As the ability to predict future health status increases, the lack of intertemporal insurance will become more problematic. The article concludes by relating health insurance to the central goal of medical care expenditures – better health. Studies to date are not clear on which approaches to health insurance promote health in the most cost-efficient manner. Resolving this question is the central policy concern in health economics.

/pdf/the-anatomy-of-health-insurance-1ueucby9wv.pdf

The Anatomy of Health Insurance

https://www.rand.org/content/dam/rand/pubs/reports/2007/R1149-1.pdf

On Having Your Cake and Eating It Too: Econometric Problems in Estimating the Demand for Health Services

This paper develops a framework for estimating demand for medical care, expanding Grossman’s ‘investment model’ in three significant ways: multiple medical inputs are allowed in production of health, reimbursement insurance is introduced (altering the net price of care) and choice of different ‘styles’ of care is allowed.

/pdf/price-and-income-elasticities-for-medical-care-services-4risvmaoq3.pdf

Price and Income Elasticities for Medical Care Services

https://www.rand.org/content/dam/rand/pubs/reports/2008/R976.pdf

Charles E. Phelps

Papers

On Having Your Cake and Eating It Too: Econometric Problems in Estimating the Demand for Health Services

Price and Income Elasticities for Medical Care Services

The Effects of Coinsurance on Demand for Physician Services

Measurement issues in the second generation of social experiments: The health insurance study☆