Moral Hazard and Market Capacity: Evidence from a Natural Experiment in Germany

Abstract

It is well known that health insurance coverage increases the demand for health services. However, evidence on the effects of this increased demand on the structure and capacity of the health services market is relatively scarce. We analyze the effects of a reform in the German social health insurance system which caused exogenous variation in coverage for services across different geographic regions. A formal model predicts that the reform led to an immediate decline in demand for services and that it decreased the market capacity in the long run. Our empirical analysis provides strong support for these predictions. We show that the reform was welfare improving under standard assumptions and discuss possible market frictions which could weaken or reverse these conclusions about welfare. Our study informs the ongoing policy debate about the effects of insurance coverage on the societal costs for health care.

Keywords: Moral Hazard, Market Capacity, Health Insurance

JEL Classification: D82, H24, I13