The Moral Hazard Effects of Consumer Responses to Targeted Cost-Sharing

As a means of reducing health care spending, several employers and insurers have recently implemented innovative benefit designs. These benefit designs typically use network exclusions or cost-sharing to incentivize patients to receive care from less expensive providers. We study the effects of a targeted cost-sharing program for outpatient surgeries implemented by the California Public Employees Retirement System (CalPERS) in 2012. This program, reference pricing, uses non-linear cost-sharing to incentivize consumers to receive care from low-priced providers. For several common surgical services, CalPERS established price thresholds. Patients who receive care from providers above this reference price are responsible for the full difference between the provider’s price and the reference price.

We use a structural demand model to estimate the effects of the reference pricing program on moral hazard. We make a key distinction between the traditional, extensive margin model of moral hazard, which focuses on the differences in quantity of care consumed, and intensive margin moral hazard, which holds quantity constant but focuses on how patients select providers based on provider prices. Unlike much of the existing literature, which focuses on extensive margin moral hazard, we focus specifically on intensive margin moral hazard.

To estimate the effects of the program, we combine 2009-2013 medical claims data for CalPERS patients with claims data for non-CalPERS patients enrolled in the same insurance plan and subject to the same provider networks. Using the pre/post and treatment/control nature of the data, we estimate changes in patient choice of provider. Our results suggest that the program leads to an approximately 6.8% increase in price sensitivity for CalPERS patients. We find no evidence that the program leads to changes in provider distance or quality.

This study follows recent papers that find little evidence that high-deductible health plans (HDHPs) spur consumer price shopping. Nearly all HDHP-induced consumer behavior changes come from reductions in utilization of medical services, the extensive margin. Our results suggest that the targeted nature of reference pricing programs lead to reductions in intensive moral hazard as patients shift demand to less expensive providers.