Moral Hazard on the ACA Exchanges: Evidence from a Cost-Sharing Subsidy Discontinuity

Abstract

This paper examines the moral hazard effects of cost-sharing subsidies on the Affordable Care Act's Health Insurance Exchanges. Exploiting a sharp discontinuity in subsidy generosity at 150% of the federal poverty level, we compare healthcare spending for individuals just above and below this threshold using a regression discontinuity design and data from the Medical Expenditure Panel Survey. We find that individuals just below 150% FPL who receive the most generous subsidies spend approximately $1,860 more annually on healthcare compared to those just above the threshold receiving less generous subsidies, implying an elasticity of -0.52. Several analyses suggest this discontinuity reflects moral hazard rather than adverse selection or health differences across the income threshold. The results highlight the significant impact of moral hazard induced by generous cost-sharing subsidies, with important implications for the design of means-tested health insurance subsidies.

Keywords: D82, D60, G22, I13, I18 Moral Hazard, Health Insurance, Elasticity of Healthcare, Subsidy Design