Habit Formation in the Utilization of Health Care Services

54 Pages Posted: 3 Oct 2022

Abstract

We extend the literature on habit formation to the theory of health capital and utilization of health care services. Using the Grossman model of health capital, we show that habitual preferences imply intertemporal dependency in utilization and the resistance of demand to price shocks. Using panel data from the Health and Retirement Study we exploit the known biases of OLS and fixed effect estimators in the dynamic panel model setting to bound estimates from the Arellano-Bond model. We find evidence of intertemporal dependency in the use of nursing home nights, prescription drugs and dental care visits, but not several other health care services. By leveraging data on episodes of care from the Rand Health Insurance Experiment, we demonstrate that our main findings are not an artifact of supplier-induced demand. We then exploit the exogenous price change in health care services due to Medicare enrollment at age 65 to show that the use of nursing home nights, prescription drugs and dental visits, as well as several preventive care services respond slowly to price shocks. Our findings suggest that policies designed to nudge consumption could have long term effects on health care utilization.

Keywords: Habit formation, Health care utilization, Dynamic panel data model

Suggested Citation

Xue, Bingjin and Meyerhoefer, Chad D., Habit Formation in the Utilization of Health Care Services. Available at SSRN: https://ssrn.com/abstract=4236124 or http://dx.doi.org/10.2139/ssrn.4236124

Bingjin Xue (Contact Author)

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

Chad D. Meyerhoefer

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

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