Health Care Price Elasticity

Price elasticity refers to the change in how much a consumer will buy based on price changes.  If something gets cheaper, you expect consumers to generally buy more.  If something gets more expensive, they buy less.  Figuring out exactly what these changes are is of some interest, particularly in health care, with its complex payment mechanisms.  A study in the Journal of Health Economics provides one perspective on health price elasticities.   (JHE Article)   The researchers used a large data base from 2008 to 2014 containing claims for 171 million member months.  They constructed a detailed model to try to determine the effects of actual cost-sharing in a particular month on the use of services.  The presence of so many deductibles, copayments, coinsurance and out-of-pocket limits makes it difficult for consumers and researchers to know what they will pay for a particular service at a particular time.  Price in the context of this study is the actual out-of-pocket cost to the consumer.  The use of such a large data base not only increases the power of the analysis but also allows for estimation of elasticities for seldom-used services.  The researchers also look at response to the spot, or immediate price, versus what price might be over the year.  Health consumers appear to be more responsive to the immediate price, as opposed to understanding that when they use up their deductible or out-of-pocket maximum, the average price over a year changes.  Of course, price is not the only factor in determinations of use of health services–the consumer’s perception of the urgency of treatment need and their perception of their economic situation can also be major influences on service use.  Wealthier consumers and those with serious health problems are obviously going to have lower price sensitivity.

Overall elasticity is obviously found to be negative, and substantial.  Outpatient services were found to have an elasticity of around -.29.  Pharmacy reflected one of about -.50.  Inpatient services have an elasticity of about -.30, reflecting the fact that inpatient use is often unavoidable.  Maternity care and ER use have very low elasticities.  Surgery and dialysis aren’t elastic at all.  Mental health care has a moderate elasticity of around -.29.  Men and women don’t appear to have different price responses, but spending on children is less elastic.  Patients who work in higher-paying industries seem less price sensitive as are those covered by plans with lower cost-sharing requirements.    Personally, I am not sure the researchers are accurately capturing the variability of consumer response or modeling how they make health care-seeking decisions correctly.  But the general trend of their research is consistent with a well-observed pattern of consumers increasing health utilization toward the end of a year, when deductibles have often been exhausted, and the results are consistent with commonsense.  One of the most valuable aspects of this kind of research is not only for plan design, but to understand consumer behavior and be able to improve that behavior by education, for example, helping consumers understand how to anticipate their total cost-sharing and effective out-of-pocket prices during a plan year.