Rational Behavior in the Presence of Coverage Ceilings and Deductibles

Randall Ellis

RAND Journal of Economics, 1986, vol. 17, issue 2, 158-175

Abstract: Consumers of health care services with insurance plan features such as deductibles, copayments, and coverage ceilings, in which the price of health care depends upon expenditures accumulated during a single year, should rationally anticipate the impact of current consumption decisions on the price of health care later in the year. We show that in the absence of wealth effects and risk aversion, a utility-maximizing consumer should base current consumption decisions on the expected end-of-year price of health care. In a specific model with risk aversion and lumpy consumption decisions we show that the expected end-of-year price remains close to the true shadow price of health care for plausible insurance plan and demand parameters. We use this result in an econometric model of the demand for ambulatory mental health services.

Date: 1986
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