Consumer Responses to Multiple Prices in Health Insurance

Health insurance contracts generally feature multiple types of patient cost-sharing, including deductibles, copayments, and coinsurance. A number of recent studies indicate that consumers don’t fully comprehend or rationally respond to these often complex incentive structures, and researchers are still unsure of which model of consumer behavior we should use to do welfare analysis and generate counterfactual predictions of varying each of these multiple dimensions of health insurance generosity. Hence, it is difficult to extrapolate elasticities from the literature estimated off of single price changes to estimate counterfactual spending responses to varying possibly more than one other cost-sharing dimension. With this in mind, it is valuable to actually observe multiple dimensions changing and directly estimate the spending responses to multiple price changes in a given setting. In thinking about optimal policy design, identifying the margins of behavior these incentives affect informs which dimensions are most effective to target patient cost-sharing.

I leverage a unique dataset that contains variation in multiple dimensions of cost-sharing to characterize consumer responses to changes in both deductibles and copayments. Using variation in insurance plan choice sets offered by employers over time, I find that small changes in office visit copayments have effects on total annual spending comparable to a modest change in the deductible. There are many similarities in patient behavioral responses to deductibles and copayments, despite the different margins of spending the incentives nominally affect. The data suggest a model of patient behavior where both types of patient incentives affect the number of medical encounters, but not the intensity of treatment per encounter.