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An important condition for optimal health insurance is that the level of health care coverage is inversely related to the elasticity of demand. We show that this condition is not satisfied for voluntary deductibles in the Netherlands, which are optional deductibles on top of the mandatory deductible introduced by the Dutch government. We find that low-risk types, that mainly choose voluntary deductibles, have a lower elasticity of demand than high-risk types. Moreover, we show that voluntary deductibles introduce equity problems as it results in non-trivial cross subsidies from high-risk to low-risk types. Capping the level of voluntary deductibles (imposing minimum generosity) is likely to be welfare enhancing in the Netherlands., Competing Interests: Declaration of Competing Interest The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper., (Copyright © 2023 The Authors. Published by Elsevier B.V. All rights reserved.)

In this paper, I study tiered cost sharing, an innovative incentive structure designed to steer patients toward low-cost providers using large out-of-pocket price differentials. Using administrative data from New Hampshire, where two large insurers utilize tiered pricing programs, I estimate the effects of tiering on choices and spending for common gastrointestinal endoscopic procedures. I first conduct a difference-in-differences analysis using the rollout of one insurer's tiered option. I then develop and estimate a demand model to explicitly compare the tiered design with other common plans. Both the reduced form and structural models imply that the tiered plans are associated with 4.5%-6.3% less in mean per-episode spending than high-deductible and coinsurance-based plans, and do not affect the likelihood of seeking care. I find evidence that the savings is in part due to a salience or "simple pricing" effect whereby patients respond to tiered out-of-pocket prices but not to traditional deductibles or coinsurance rates., (Published by Elsevier B.V.)

This paper studies a market for a medical product in which there is perfect competition among health insurers, while the good is sold by a monopolist. Individuals differ in their severity of illness and there is ex postmoral hazard. We consider two regimes: one in which insurers use coinsurance rates (ad valorem reimbursements) and one in which insurers use co-payments (specific reimbursements). We show that the induced equilibrium with co-payments involves a lower producer price and a higher level of welfare for consumers even though it may imply a larger consumer price. This result provides strong support for a reference price based reimbursement policy., (Copyright © 2022. Published by Elsevier B.V.)

Understanding how health care utilization responds to cost-sharing is of central importance for providing high quality care and limiting the growth of costs. We study whether the framing of cost-sharing incentives has an effect on health care utilization. For this we make use of a policy change in the Netherlands. Until 2007, patients received a refund if they consumed little or no health care; the refund was the lower the more care they had consumed. From 2008 onward, there was a deductible. This means that very similar economic incentives were first framed in terms of smaller gains and later as losses. We find that patients react to incentives much more strongly when they are framed in terms of losses. The effect on yearly spending is 8.6 percent. This suggests that discussions on the optimal design of cost-sharing incentives should also revolve around the question how these are presented to patients., Competing Interests: Declaration of Competing Interest There are no conflicts of interest., (Copyright © 2021 The Author(s). Published by Elsevier B.V. All rights reserved.)

Enrollment in plans with high deductibles has increased more than seven-fold in the last decade. Proponents of these plans argue that high deductibles could reduce wasteful spending by providing patients with incentives to limit use of low-value services that offer little or no clinical benefit. Others are concerned that patients may respond to these incentives by reducing their use of medical services indiscriminately and regardless of clinical benefit, which may negatively impact health outcomes. This study uses individual-level insurance claims data (2008-2013) and plausibly exogenous changes in plan offerings within firms over time to estimate the intent-to-treat and local-average treatment effects of high-deductible plan offerings on spending on 24 low-value services received in the outpatient setting. We find that firm offer of a high-deductible plan leads to a 13.7% ($5.23) reduction in average enrollee spending on low-value outpatient services and a 5.2% ($105.77) reduction in overall outpatient spending. We also find reductions in spending on measures of low-value imaging and laboratory services. We find some evidence that offering high-deductible plans disproportionately reduces low-value spending relative to overall spending, indicating that deductibles may be a way to incentivize value-based decision making., (Copyright © 2021 Elsevier B.V. All rights reserved.)

This paper examines the effects of the reference pricing program implemented by the California Public Employees Retirement System (CalPERS) in 2012. The program uses targeted cost-sharing to incentivize patient price shopping. We find that the program leads to a 10.3% increase in the use of low-price providers and reduces the average cost per procedure by 12.5%. We further estimate that the program reduces medical spending by $218.8 per procedure, which we estimate is approximately 53.7% of the excessive spending that is due to patient choice of higher price providers caused by insurance coverage, at the expense of a $94.3 (or 12.5%) reduction in consumer surplus. The cost savings from the reference pricing program is about two to three times as large as the reduction from implementing a high-deductible health plan, while the accompanying consumer surplus reduction is much smaller under reference pricing., (Copyright © 2017 Elsevier B.V. All rights reserved.)

The Affordable Care Act (ACA) provides assistance to low-income consumers through both premium subsidies and cost-sharing reductions (CSRs). Low-income consumers' lack of health insurance literacy or information regarding CSRs may lead them to not take-up CSR benefits for which they are eligible. We use administrative data from 2014 to 2016 on roughly 22 million health insurance plan choices of low-income individuals enrolled in ACA Marketplace coverage to assess whether they behave in a manner consistent with being aware of the availability of CSRs. We take advantage of discontinuous changes in the schedule of CSR benefits to show that consumers are highly sensitive to the value of CSRs when selecting insurance plans and that a very low percentage select dominated plans. These findings suggest that CSR subsidies are salient to consumers and that the program is well designed to account for any lack of health insurance literacy among the low-income population it serves., (Copyright © 2017 Elsevier B.V. All rights reserved.)

Health insurance companies curb price-insensitive behavior and the moral hazard of insureds by means of cost-sharing, such as tiered co-payments or reference pricing in drug markets. This paper evaluates the effect of price limits - below which drugs are exempt from co-payments - on prices and on demand. First, using a difference-in-differences estimation strategy, we find that the new policy decreases prices by 5 percent for generics and increases prices by 4 percent for brand-name drugs in the German reference price market. Second, estimating a nested-logit demand model, we show that consumers appreciate co-payment exempt drugs and calculate lower price elasticities for brand-name drugs than for generics. This explains the different price responses of brand-name and generic drugs and shows that price-related co-payment tiers are an effective tool to steer demand to low-priced drugs., (Copyright © 2017 Elsevier B.V. All rights reserved.)

The extent to which premium subsidies can influence health insurance choices is an open question. In this paper, we explore the regional variation in subsidy schemes in Switzerland, designed as either in-kind or cash transfers, to study their impact on the choice of health insurance deductibles. Using health survey data and a difference-in-differences methodology, we find that in-kind transfers increase the likelihood of choosing a low deductible plan by approximately 4 percentage points (or 7%). Our results indicate that the response to in-kind transfers is strongest among women, middle-aged and unmarried individuals, which we explain by differences in risk-taking behavior, health status, financial constraints, health insurance and financial literacy. We discuss our results in the light of potential extra-marginal effects on the demand for health care services, which are however not supported by our data., (Copyright © 2017 Elsevier B.V. All rights reserved.)

"Consumer-Directed" Health Plans (CDHPs), those with high deductibles and personal medical accounts, are intended to reduce health care spending through greater patient cost exposure. Prior research agrees that in the first year, CDHPs reduce spending. There is little research and in it results are mixed regarding the impact of CDHPs over the longer term. We add to this literature with an intent-to-treat, difference-in-differences analysis of health care spending over up to three years post CDHP offer among 13 million person-years of data from 54 large US firms, half of which offered CDHPs. To strengthen the identification, we balance observables over time within firm, by developing weights through a machine learning algorithm, generalized boosted regression. We find that spending is reduced for those in firms offering CDHPs in all three years post offer relative to firms continuing to offer lower-deductible plans. The reductions are driven by spending decreases in outpatient care and pharmaceuticals, with no evidence of increases in emergency department or inpatient care over the three-year window., (Copyright © 2016 Elsevier B.V. All rights reserved.)

We explore the hierarchy of two instruments, waiting time and coinsurance for medical treatment, for optimally solving the tradeoff between the economic gains from risk sharing and the losses from moral hazard. We show that the optimal waiting time is zero, given that the coinsurance rate is optimally set.

The presence of voluntary deductibles in the Swiss and Dutch mandatory health insurance has important implications for the respective risk equalization systems. In a theoretical analysis, we discuss the consequences of equalizing three types of expenditures: the net claims that are reimbursed by the insurer, the out-of-pocket expenditures and the expenditure savings due to moral hazard reduction. Equalizing only the net claims, as done in Switzerland, creates incentives for cream skimming and prevents insurers from incorporating out-of-pocket expenditures and moral hazard reductions into their premium structure. In an empirical analysis, we examine the effect of self-selection and conclude that the Swiss and Dutch risk equalization systems do not fully adjust for differences in health status between those who choose a deductible and those who do not. We discuss how this may lead to incentives for cream skimming and to a reduction of cross-subsidies from healthy to unhealthy individuals compared to a situation without voluntary deductibles.

Our estimation strategy uses sequences of conditional probability functions, similar to those used in discrete time hazard rate analyses, to construct a discrete approximation to the density function of an outcome of interest conditional on exogenous explanatory variables. Once the conditional density function has been constructed, we can examine expectations of arbitrary functions of the outcome of interest and evaluate how these expectations vary with observed exogenous covariates. We demonstrate the features and precision of the conditional density estimation method (and compare it to other commonly used methods) through Monte Carlo experiments and an application to health expenditures using the RAND Health Insurance Experiment data. Overall, we find that the approximate conditional density estimator provides accurate and precise estimates of derivatives of expected outcomes for a wide range of types of explanatory variables.

Between 1970 and 1986, all Canadian provinces introduced some version of a prescription drug subsidy for those aged 65 years or over and since 1986, all the provinces have increased copayments or deductibles to some degree. Employing a first-order approximation to the welfare gains from a subsidy, we find evidence that these subsidies have been less redistributive than an absolute per household cash transfer but slightly more redistributive than a transfer that would increase each household's income by the same percentage. Such evidence may have relevance for predicting the redistributive effects of a potential national prescription drug plan for seniors in the US.

How does the release of health plan performance ratings influence employee health plan choice? A natural experiment at General Motors (GM) Corporation provides valuable evidence on this question. During the 1997 open enrollment period, GM disseminated a health plan report card for the first time. By comparing 1996 and 1997 enrollment patterns, our analysis estimates the impact of the report card information while accounting for fixed, unobserved plan traits. Results indicate that employees are less likely to enroll in plans requiring relatively high out-of-pocket contributions. Results with respect to report card ratings suggest that individuals avoid health plans with many below average ratings.

Most theoretical and empirical work on efficient health insurance has been based on models with linear insurance schedules (a constant co-insurance parameter). In this paper, dynamic optimization techniques are used to analyse the properties of optimal non-linear insurance schedules in a model similar to one originally considered by Spence and Zeckhauser (American Economic Review, 1971, 61, 380-387) and reminiscent of those that have been used in the literature on optimal income taxation. The results of a preliminary numerical example suggest that the welfare losses from the implicit subsidy to employer-financed health insurance under US tax law may be a good deal smaller than previously estimated using linear models.

A recent policy change by the University of California (UC) provides a unique natural experiment for investigating the sensitivity of consumers to health plan premiums. When the UC moved to a policy of limiting its contribution to the cost of the least expensive plan, out-of-pocket premiums increased for roughly one-third of UC employees. We examine the extent to which UC employees switched plans in response to this change in premiums. Our results indicate a strong response. Individuals facing premium increases of less than $10 were roughly 5 times as likely to switch plans as those whose premiums remained constant.

Choosing optimal health insurance coverage involves a trade-off between the gain from risk reduction and the deadweight loss from moral hazard. This paper examines this trade-off empirically by estimating both the demand for health insurance and the demand for health services. It relies on data from a randomized controlled trial of cost-sharing's effects on the use of health services and on the health status for a general, non-elderly population.

If premiums for health insurance are not risk related, there exists a consumer information surplus that may result in adverse selection. Our results indicate that insurers can greatly reduce this surplus by risk-adjusting the premium. We conclude that there need not be any substantial unavoidable consumer information surplus if consumers can choose whether to take a deductible for a one- or two-year health insurance contract with otherwise identical benefits. Therefore, adverse selection need not be a problem in a competitive insurance market with risk-adjusted premiums or vouchers and with such a consumer choice of health plan.

Demand-side cost sharing and the supply-side reimbursement system provide two separate instruments that can be used to influence the quantity of health services consumed. For risk-averse consumers, optimal payment systems--pairs of insurance and reimbursement plans--are characterized by conflict rather than consensus between patient and provider about the quantity of treatment. A model of conflict resolution based on bargaining theory is used to represent the outcome when the payment system creates divergences between desired demand and desired supply. Using that model, we describe the optimal combination of insurance and reimbursement systems that maximize consumer welfare.

This paper presents a theoretical model of capitation contracts. The consumer's ex ante choice of medical plan is derived under flexible assumptions about provider-patient decision-making. The optimal medical plan is shown to combine full insurance with a provider payment system that is a mixture of capitation and partial reimbursement of provider costs. This solution strongly parallels the 'mixed payment' system derived by Ellis and McGuire (1986, 1990) in the context of prospective payment, though the optimal medical plan derived below may in fact be preferred to that solution in a world with endogenous admissions.

Physicians typically carry virtually complete malpractice insurance coverage. This contradicts standard theoretical predictions that under a negligence rule of liability there should be no demand for insurance, and insurance policies under moral hazard will contain co-payment provisions. It is argued that judicial 'errors' in defining negligence generate a demand for liability and legal defense insurance. Physician co-payment undermines the insurer's incentives for legal defense and thus induces a trade-off between loss reduction by injury prevention and by legal defense. Fee-for-service reimbursement further distorts the physician's choice between injury prevention and insurance. Implications for the deterrent function of the tort system are discussed.

Restoring financial incentives to encourage patients to shop for the lowest prices for medical care underlies current procompetitive health financing proposals. This paper analyzes the impact of one such financial incentive--cost-sharing in health insurance--on patients' provider shopping behavior. Using data from the 'Health Insurance Study', the relationship of cost-sharing with the specialty type of the primary care provider and with the costliness of the selected provider is investigated. The results were mixed as to whether patients who have only catastrophic coverage seek lower priced physicians than patients who have free care; however, any differences were small. Even among the well-educated, who are likely to be more efficient than the less educated at obtaining comparative price information, the effects of cost-sharing on the costliness of the selected medical care provider were minimal.

As part of the prospective payment system, the government pays 'outlier' payments for especially long or expensive cases. These payments can be viewed as insurance for the hospital against excessive losses. They mitigate problems of access and underprovision of care for the sickest patients, and provide additional payments to the hospitals that take care of them, thereby making payments to hospitals more equitable. This paper characterizes the outlier payment formulae that minimize risk for hospitals under any fixed constraints on the sum of outlier payments and minimum hospital coinsurance rate. We then simulate per-case payments for a policy that did not include any outlier payments, the current outlier policy, and several other policies that minimize risk subject to different coinsurance constraints. The current outlier policy achieves each of its goals to at least some extent, but more insurance could be provided without lessening attainment of the other goals. We also discuss some problems with the implementation of the current policy, such as its reliance on day outliers.

The fraction of the U.S. population with private dental insurance coverage increased considerably during the past two decades. Experimental data from the Rand Health Insurance Study have revealed that dental insurance is an important determinant of demand. In this analysis, detailed health insurance data from the National Medical Care Expenditure Survey are used to study the effects of insurance on demand by a standard population of white adults aged 16 to 64. Results from this national probability sample are generally comparable to those from the Rand experimental data. Estimates indicate that the primary effects of dental insurance are to facilitate access to care and to increase dental expenditures. Results are consistent with the notion that first-dollar coverage exerts a greater effect on demand than insurance which requires payment of a deductible. Findings also suggest that insurance affects the mix of dental services received. Loss of dental benefits because of cost containment efforts will result in significant reductions in demand for dental services.

This paper develops a model in which physicians choose the level of services to be provided to their patients. We show that if physicians undervalue benefits to patients relative to hospital profits, prospective payment, a system in which hospitals receive a payment dependent on the diagnosis-related group within which a patient falls, can lead to too few services being provided. In contrast, a 'cost-based' reimbursement system is shown to result in too many services being provided. Competition between hospitals for physicians will tend to augment both of these problems. We also examine a mixed reimbursement system, in which hospital reimbursements are paid partly prospectively and partly cost-based. This system is shown under a variety of circumstances to be superior to the other two reimbursement systems by improving the incentives for the efficient level of services, reducing incentives to unnecessarily admit or reclassify patients, and reducing risk to providers.

We tested the hypothesis that health insurance premium costs per employee are lower for employee groups where multiple health plans are offered and the employer pays a level dollar amount of the chosen premium than for employee groups where these two conditions are not met. Proposed national legislation relies on these conditions to create a competitive health care market. Data on 56 employee groups in 1981 and 66 employee groups in 1982 were collected from two surveys of large employers in Minnesota. Regression analysis of premium data from both surveys rejected the hypothesis. Indemnity plans in multiplan groups were cheaper if the employer paid a level dollar contribution versus a level percent (including 100) contribution. However, groups offered only an indemnity plan had lower premiums than groups meeting the two legislative conditions. These findings apply to both individual and family coverage premiums and are not caused by systematic differences in benefit provisions, employee demographics or factors influencing loading charges. Our findings cast doubt on attempts to achieve health care competition by legislative changes in insurance options and contribution methods.

Recently the Federal Employees Health Benefits Program has been the subject of much discussion in Washington as a result of the rather large premium increases in 1982 and 1983, the delayed open season of 1981, and the benefit reductions. Enrollees responded in May 1982 to the changes; a record number switched plans. It appears that enrollees were simply responding to the new premiums and benefits. In this paper we describe the economic incentives faced by enrollees in the FEHBP. We find that, due to the strong incentives for enrollees to leave certain high-cost plans, continued instability should be expected. In fact, the disparity between expected benefits and premium is so great for some plans (e.g. the Blue Cross high-option) that their survival is questionable. This lack of stability raises important questions about the viability of some pro-competition proposals involving multiple-insurer systems.

This paper applies insurance principles to the issues of optimal outlier payments and designation of peer groups in Medicare's case-based prospective payment system for hospital care. Arrow's principle that full insurance after a deductible is optimal implies that, to minimize hospital risk, outlier payments should be based on hospital average loss per case rather than, as at present, based on individual case-level losses. The principle of experience rating implies defining more homogenous peer groups for the purpose of figuring average cost. The empirical significance of these results is examined using a sample of 470,568 discharges from 469 hospitals.