Intertemporal Substitution in Health Care Demand: Evidence from the Rand Health Insurance Experiment

46 Pages Posted: 7 Nov 2016 Last revised: 28 Nov 2016

See all articles by Haizhen Lin

Haizhen Lin

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Daniel W. Sacks

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: November 2016

Abstract

Nonlinear cost-sharing in health insurance encourages intertemporal substitution be- cause patients can reduce their out-of-pocket costs by concentrating spending in years when they hit the deductible. We test for such intertemporal substitution using data from the RAND Health Insurance Experiment, where people were randomly assigned either to a free care plan or to a cost-sharing plan which had coinsurance up to a maximum dollar expenditure (MDE). Hitting the MDE—leading to an effective price of zero—has a bigger effect on monthly health care spending and utilization than does being in free care, because people who hit the MDE face high future and past prices. As a result, we estimate that sensitivity to short-lasting price changes is about twice as large as sensitivity to long-lasting changes. These findings help reconcile conflicting estimates of the price elasticity of demand for health care, and suggest that high deductible health plans may be less effective than hoped in controlling health care spending.

Suggested Citation

Lin, Haizhen and Sacks, Daniel W., Intertemporal Substitution in Health Care Demand: Evidence from the Rand Health Insurance Experiment (November 2016). NBER Working Paper No. w22802, Available at SSRN: https://ssrn.com/abstract=2865538

Haizhen Lin (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

Daniel W. Sacks

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

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