Essays in Health Economics

Abstract

Health insurance plans use price incentives both to promote efficiency in healthcare spending and to allocate consumers among different plans. This dissertation studies how incentives affect healthcare spending and plan choice. I focus on how frictions in health insurance and healthcare markets influence behavioral responses to prices and the ability of price instruments to achieve intended goals. The first chapter provides new evidence on the optimality of consumer responses to cost-sharing using novel variation in two common types of cost-sharing incentives: deductibles and copayments. Economic theory predicts that a fully informed, frictionless, rational consumer would respond equivalently to a marginal dollar in out-of-pocket (OOP) costs from all types of cost-sharing incentives. In contrast, I find that consumers are substantially more responsive to copayment than to deductible OOP costs. These results are consistent with barriers to consumers' understanding how different types of cost-sharing translate into OOP costs. The second chapter provides new evidence on the potential substitutability or complementarity of demand and supply side price incentives by estimating whether consumers' price sensitivity to health insurance cost-sharing varies based on the price incentives of their primary care providers. I find some evidence that demand and supply-side incentives can be complements or substitutes, depending on the margin of care and patient population. Overall, my findings indicate that plan designers should consider potential interaction effects of both types of prices when setting cost-sharing levels and provider payment contracts. The third chapter estimates how government subsidies affect the equilibrium premiums and benefit generosity of health insurance plans in the Medicare Advantage market and finds that, on average, subsidies are passed-through via greater benefits rather than lower premiums. We argue that due to a lack of demand response to premium reductions below a salient threshold, plans have an incentive to pass-through subsidies via more generous benefits that consumers may not value at cost. Lack of premium transparency may distort the combination of premiums and benefits offered in equilibrium, leading to premiums and benefits that are too high.