We always enjoy seeing the latest papers from the National Bureau of Economics on health care topics, since they usually provide an in-depth examination of important topics. A recent report examined moral hazard in health insurance, as reflected in consumer decisions about utilization over an insurance contract and how those decisions may be affected by perceptions of future versus present costs to the consumer. (NBER Report) Health insurance today typically imposes significant cost-sharing on the consumer, in the form of a deductible and copayments or coinsurance, all capped by an out-of-pocket maximum. This can make deciphering consumer response to “prices” or what the consumer pays for a medical service very complex, since the price varies throughout the year. The researchers were most interested in how anticipation of costs affected behavior, or how forward-looking do consumers appear to be in making utilization decisions. Do they consider their likely use and spending over the full year, or are they strongly affected by the current price situation, for example, with a full deductible at the start of a contract year.
The authors looked at the behavior of employees who gained coverage in the middle of a contract year to help untangle price effects. Because of the annual nature of a deductible, employees who get coverage after the start of the year have less time to spend down the deductible. By comparing the initial utilization of employees who join in different months throughout the contract year, the researchers hoped to gain insight into how responsive consumers were to their immediate or spot price, versus their future price. The authors find that consumers are mostly what they call “myopic” or responding only to their immediate price, but show enough forward-looking behavior to affect utilization. They estimate that a 10% increase in the future price is associated with 6-8% decline in immediate utilization. It is unclear how much consumers lack of understanding of their price at various points in the year affects their decisions. This research has great importance in designing the cost-sharing features of health insurance and suggests that deductibles may deter too much utilization, while the lesser cost-sharing once the deductible is exhausted and certainly once the out-of-pocket maximum is reached may encourage unnecessary utilization.