Moral Hazard and Forward-looking Behavior

Many health insurance plans consist of deductibles and co-insurance rates to contain health care spending by reducing demand-side moral hazard. In addition, co-payments are commonly combined with a stop loss to limit out-of-pocket spending. These features, however, generate nonlinear budget sets and imply that the spot price for healthcare differs from the (expected) future price. As a result, the analysis of consumers’ behavior in the presence of non-linear pricing is closely related to the question whether consumers are myopic or forward-looking. We analyze an exogenous increase in the price in the subsequent year on the current demand for healthcare. We find that individuals facing a price increase in the subsequent year increase their current demand by CHF 40 to 50 compared to their peers facing a constant price across years. Thus, we provide evidence for forward-looking behavior across years. The estimated effect corresponds to an increase by roughly 7% and translates into an arc-elasticity of 0.058 as the (expected) end-of-year price jumps from roughly zero to 0.6 across years. Although this demand response seems to be rather small, we provide some evidence that moral hazard estimates based on yearly data can be severely biased upwards if forward-looking behavior is not taken into account.