Behavioral Hazard in Health Insurance

63 Pages Posted: 20 Oct 2012

See all articles by Katherine Baicker

Katherine Baicker

Harvard University - Department of Health Policy & Management; National Bureau of Economic Research (NBER)

Sendhil Mullainathan

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

Joshua Schwartzstein

Dartmouth College

Date Written: October 2012

Abstract

This paper develops a model of health insurance that incorporates behavioral biases. In the traditional model, people who are insured overuse low value medical care because of moral hazard. There is ample evidence, though, of a different inefficiency: people underuse high value medical care because they make mistakes. Such "behavioral hazard" changes the fundamental tradeoff between insurance and incentives. With only moral hazard, raising copays increases the efficiency of demand by ameliorating overuse. With the addition of behavioral hazard, raising copays may reduce efficiency by exaggerating underuse. This means that estimating the demand response is no longer enough for setting optimal copays; the health response needs to be considered as well. This provides a theoretical foundation for value-based insurance design: for some high value treatments, for example, copays should be zero (or even negative). Empirically, this reinterpretation of demand proves important, since high value care is often as elastic as low value care. For example, calibration using data from a field experiment suggests that omitting behavioral hazard leads to welfare estimates that can be both wrong in sign and off by an order of magnitude. Optimally designed insurance can thus increase health care efficiency as well as provide financial protection, suggesting the potential for market failure when private insurers are not fully incentivized to counteract behavioral biases.

Suggested Citation

Baicker, Katherine and Mullainathan, Sendhil and Schwartzstein, Joshua, Behavioral Hazard in Health Insurance (October 2012). NBER Working Paper No. w18468, Available at SSRN: https://ssrn.com/abstract=2164592

Katherine Baicker (Contact Author)

Harvard University - Department of Health Policy & Management ( email )

677 Huntington Avenue
Boston, MA 02115
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sendhil Mullainathan

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-2720 (Phone)
617-495-7730 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-588-1473 (Phone)
617-876-2742 (Fax)

Joshua Schwartzstein

Dartmouth College ( email )

Department of Sociology
Hanover, NH 03755
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
54
Abstract Views
642
rank
412,548
PlumX Metrics