Moral Hazard in Health Insurance: How Important is Forward Looking Behavior?

59 Pages Posted: 3 Feb 2012

See all articles by Aviva Aron-Dine

Aviva Aron-Dine

Center on Budget and Policy Priorities (CBPP)

Liran Einav

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Mark R. Cullen

Stanford University

Date Written: February 2012

Abstract

We investigate whether individuals exhibit forward looking behavior in their response to the non-linear pricing common in health insurance contracts. Our empirical strategy exploits the fact that employees who join an employer-provided health insurance plan later in the calendar year face the same initial ("spot") price of medical care but a higher expected end-of-year ("future") price than employees who join the same plan earlier in the year. Our results reject the null of completely myopic behavior; medical utilization appears to respond to the future price, with a statistically significant elasticity of medical utilization with respect to the future price of -0.4 to -0.6. To try to quantify the extent of forward looking behavior, we develop a stylized dynamic model of individual behavior and calibrate it using our estimated behavioral response and additional data from the RAND Health Insurance Experiment. Our calibration suggests that the elasticity estimate may be substantially smaller than the one implied by fully forward-looking behavior, yet it is sufficiently high to have an economically significant effect on the response of annual medical utilization to a non-linear health insurance contract. Overall, our results point to the empirical importance of accounting for dynamic incentives in analyses of the impact of health insurance on medical utilization.

Suggested Citation

Aron-Dine, Aviva and Einav, Liran and Finkelstein, Amy and Cullen, Mark R., Moral Hazard in Health Insurance: How Important is Forward Looking Behavior? (February 2012). NBER Working Paper No. w17802. Available at SSRN: https://ssrn.com/abstract=1998600

Aviva Aron-Dine (Contact Author)

Center on Budget and Policy Priorities (CBPP) ( email )

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Liran Einav

Stanford University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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617-868-7242 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

Mark R. Cullen

Stanford University ( email )

Stanford, CA 94305
United States

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