Cost-Sharing or Rebate: The Impact of Health Insurance Design on Reducing Inefficient Care

Abstract

This paper investigates how the design of health insurance plans impacts individuals' treatment decisions. We vary the design between cost-sharing and rebates. We derive several hypotheses how the design of the health insurance plan affects behavior. In a laboratory experiment, we find that rebates are more effective in containing cost as individuals request significantly less inefficient low-value care under rebates than under cost-sharing. We link individual decisions to a direct measure of loss aversion but find no evidence that loss aversion influences utilization rates. Our results suggest that relative thinking and the difficulty to understand the dynamic incentive structure drive the design effect.

Keywords: laboratory experiment, cost-sharing, rebates, loss aversion, framing, relative thinking

JEL Classification: I13, I18, D02, D91