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Premium levels and demand response in health insurance: relative thinking and zero-price effects

Rudy Douven (), Ron van der Heijden, Thomas McGuire and Erik Schut
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Rudy Douven: CPB Netherlands Bureau for Economic Policy Analysis
Ron van der Heijden: CPB Netherlands Bureau for Economic Policy Analysis

CPB Discussion Paper from CPB Netherlands Bureau for Economic Policy Analysis

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 effects, 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.

JEL-codes: D91 H21 I13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hea and nep-ias
Date: 2017-10
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