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.

The demand for deductibles in private health insurance: A probit model with sample selection

This paper reviews the past 25 years of applied social research, with an emphasis on evaluation research, whose intent is the estimation of the net impacts or effects of social programs. The 1960s and early 1970s represent the "Golden Age" of evaluation, an age that ended with the Reagan Administration. During this period, the evaluation field was dominated by the randomized, controlled experimental paradigm. Accordingly, several of the major field experiments of the era are reviewed in some detail. Recently, various alternatives to this paradigm have been advanced; they too are discussed. The key lesson from the Golden Age is that the expected effects of social programs hover near zero, a devastating discovery for the social reformers of the time. Some reasons why this is the case are presented. One important

Evaluation research: An assessment.

In many different managerial contexts, consumers “leave money on the table” by, for example, their failure to claim rebates, use available coupons, and so on. This project focuses on a related problem faced by homeowners who may be reluctant to file insurance claims despite the fact their losses are covered. We model this consumer decision by introducing the concept of the “pseudodeductible,” a latent threshold above the policy deductible that governs the homeowner's claim behavior. In addition, we show how the observed number of claims can be modeled as the output of three stochastic processes that are separately, and in conjunction, managerially relevant: the rate at which losses occur, the size of each loss, and the choice of the individual to file or not file a claim. By allowing for the possibility of pseudodeductibles, one can sort out (and make accurate inferences about) these three processes. We test this model using a proprietary data set provided by State Farm, the largest underwriter of personal lines insurance in the United States. Using mixtures of Dirichlet processes to capture heterogeneity and the interplay among the three processes, we uncover several relevant “stories” that underlie the frequency and severity of claims. For instance, some customers have a small number of losses, but all are filed as claims, whereas others may experience many more losses, but are more selective about which claims they file. These stories explain several observed phenomena regarding the claims decisions that insurance customers make, and have broad implications for customer lifetime value and market segmentation.

/pdf/modeling-the-pseudodeductible-in-insurance-claims-decisions-26yui0qmm2.pdf

Modeling the “Pseudodeductible” in Insurance Claims Decisions

The gross price elasticity of demand for medical care is decomposed into two separate observable components: the medical care gross price elasticity of insurance choice and the cost-sharing elasticity of medical care When consumers alter their choice of health-care plans, the price elasticity of medical care is no longer equivalent to the cost-sharing elasticity; using the latter as a proxy for the former may produce misleading results We present conditions under which the medical care price elasticity is positive, the case of a quasi-Giffen good, and provide a theoretical foundation for extant empirical findings of a positive medical care price elasticity of insurance demand INTRODUCTION Among the developed, higher-income countries, medical care expenditures have been rising at a pace that is distinctly above overall growth rates In the United States, for example, total medical cost outlays have increased at an average rate of 89 percent since 1980, which is about 26 percentage points above the average for the aggregate economy, as measured by gross domestic product (GDP) (1) Similar patterns prevail when one examines medical expenditures in both per capita and budget share terms As a share of the US economy, medical care has nearly doubled over the 25-year period 1980 to 2005, rising from 9 percent of GDP in 1980 to 16 percent in 2005 (2) Medical care spending per capita has also increased dramatically during this period, increasing to $6,697 from $1,102 (3) Although the United States is by far the medical expenditure leader, similar trends exist in most developed countries (4) These observations prompt interest in the forces underlying medical care demand and in how individuals respond to its rising costs In this article, we analyze consumer medical care demand response to a change in the gross price of medical care, paying special attention to the interaction between the consumer's demand for medical care and his demand for health insurance, and the ensuing implications for the measurement of demand elasticities (5) Private health insurance contracts provide for a price discount at the time the insured purchases medical care; therefore, the more generous an individual's insurance coverage is, the higher might be his demand for medical care This effect of insurance on medical care demand is known as the moral hazard effect (Arrow, 1963; Pauly, 1968) It refers to the effect of insurance on the net price of medical care (ie, percentage of cost sharing times the gross price) and to the consequent incentive effects on medical care consumption In medical care, moral hazard combines with the interdependence between utilization and the insurance contract decision The choice of type of insurance is influenced by expected utilization of medical care services, whereas utilization itself is affected by the consumer's insurance contract This interaction complicates the analysis of the consumer's response to changes in medical care prices (6) We present a principal-agent model of individual consumer medical care demand that highlights this interaction, so that the consumer is allowed to change both his demand for medical care and his selection of insurance contract in response to changes in medical care prices A change in the gross price of medical care has two effects on demand: a direct effect, for fixed cost sharing, and an indirect effect through a moral hazard response that results from cost-sharing changes associated with price-induced changes in the choice of insurance plan Much of the extant literature studies the demand for medical care by examining responses to changes in cost sharing, with the gross price held constant and the choice of health insurance contract remaining fixed However, if one wants to compare medical care demand with the demand for other goods or categories of goods--or if one simply recognizes the fact that most insured consumers choose from among several insurance plans and can alter their intended choice--then the response to a change in gross price is important …

https://papers.ssrn.com/sol3/Delivery.cfm/jori_1335.pdf?abstractid=1548163&mirid=5

Implications of the Interaction Between Insurance Choice and Medical Care Demand

Using data on insurance premiums for policies with varying deductibles, together with a distribution of medical expense at a fixed ($50) deductible, we estimate the relationship between deductibles and the demand for medical care. We assume that as the deductible changes, the distribution shrinks toward zero in a multiplicative fashion. The results indicate that demand is quite sensitive to variation in a deductible in the region of $50 and becomes steadily less sensitive as the deductible rises above $75, which is consistent with a theoretical model of demand for medical care. The size of the deductible will importantly affect the costs of a national health insurance program.

Maureen Murphy

Papers

The Effect of Deductibles on the Demand for Medical Care Services