Moral Hazard in Health Insurance: How Important Is Forward Looking Behavior?

Aviva Aron-Dine, Liran Einav, Amy Finkelstein and Mark R. Cullen

No 17802, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D12 G22 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-hea and nep-ias
Note: AG EH IO PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (52)

Published as “Selection on Moral Hazard in Health Insurance,” with Amy Finkelstein, Stephen Ryan, Paul Schrimpf, and Mark Cullen, American Economic Review, 103(1), 178-219, February 2013.

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Working Paper: Moral hazard in health insurance: How important is forward looking behavior? (2012)
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