Premium Levels and Demand Response in Health Insurance: Relative Thinking and Zero-Price Effects

44 Pages Posted: 25 Sep 2017

See all articles by Rudy Douven

Rudy Douven

CPB Netherlands Bureau for Economic Policy Analysis; CPB Netherlands Bureau for Economic Policy Analysis

Ron van der Heijden

CPB Netherlands Bureau of Economic Policy Analysis; Erasmus University Rotterdam (EUR)

Thomas G. McGuire

Harvard University - Department of Health Care Policy

Frederik T. Schut

Erasmus University Rotterdam (EUR)

Date Written: September 2017

Abstract

In health care systems with a competitive health insurance market, governments or other sponsors (e.g. employers) often subsidize premiums to encourage enrolment. These subsidies are typically independent of plan choice leaving the absolute premium differences in place so as not to distort consumer choice of plan. Such subsidies do, however, change the relative premium differences across plans, which, according to theories from behavioral economics, can affect choice. Consumers might be sensitive to differences relative to a reference premium (“relative thinking”). Furthermore, consumers might be particularly sensitive to a reference premium of zero (“zero-price effect”), a relevant range for some subsidized health insurance markets. This paper tests these ideas with two sources of evidence. We argue that observed equilibria in Germany and the U.S. Medicare Advantage markets are consistent with a powerful zero-price effect, resulting in an equilibrium focal pricing at zero. This contrasts with the Netherlands where equilibrium premiums are well above zero. In an empirical test using hypothetical questions in a web-based survey in these three countries, we also find evidence for both a relative thinking and a zero-price effect in the demand for health insurance. Our findings imply that well-designed subsidies can leverage relative thinking to increase demand elasticity for health plans. Creation of a powerful reference price (e.g., at zero), however, risks subverting price competition.

Suggested Citation

Douven, Rudy and van der Heijden, Ron and McGuire, Thomas G. and Schut, Frederik T., Premium Levels and Demand Response in Health Insurance: Relative Thinking and Zero-Price Effects (September 2017). NBER Working Paper No. w23846. Available at SSRN: https://ssrn.com/abstract=3042431

Rudy Douven (Contact Author)

CPB Netherlands Bureau for Economic Policy Analysis ( email )

P.O. Box 80510
The Hague, 2508 GM
Netherlands

HOME PAGE: http://www.cpb.nl/nl/org/homepages/rcmhd/

CPB Netherlands Bureau for Economic Policy Analysis ( email )

P.O. Box 80510
The Hague, 2508 GM
Netherlands

HOME PAGE: http://www.cpb.nl/nl/org/homepages/rcmhd/

Ron Van der Heijden

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Thomas G. McGuire

Harvard University - Department of Health Care Policy ( email )

180 Longwood Ave
Boston, MA 02115
United States

Frederik T. Schut

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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