Many studies find that consumers reduce spending in response to higher health insurance cost-sharing, but there is mixed evidence as to whether these spending reductions reflect a rational trade-off between health benefits and costs. This paper provides new evidence on the rationality 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, 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. Further, both types of cost-sharing have negative cross-price effects onto non-targeted services. These results are consistent with barriers to consumers' understanding how different types of cost-sharing translate into OOP costs. Finally, I show that both deductibles and copayments reduce adherence to highly valuable chronic medications. Together, my findings indicate that copayment-based plans may be more effective in protecting consumers from high OOP costs while achieving significant spending reductions, and that more complex plans may not result in the outcomes intended.

We estimate how government subsidies affect the equilibrium premiums and benefit generosity of health insurance plans in the Medicare Advantage market and find that, on average, subsidies are passed-through via greater benefits rather than lower premiums. We argue that the way premium information is communicated to consumers influences the way in which plans pass through subsidy dollars and can account for the empirical results. More specifically, the choice environment makes it difficult for consumers to observe a large component of the plan premium, leading to a lack of demand response to premium reductions below the premium charged by traditional Medicare (the fee-for-service Part B premium). When demand does not respond to lower premiums, plans have an incentive to pass-through cost subsidies to consumers via more generous benefits that consumers may not value at cost, creating an inefficiently high level of benefit generosity. Our results provide evidence that a lack of premium transparency in the Medicare Advantage market may distort the combination of premium levels and benefit generosity offered in equilibrium, resulting in some degree of inefficiently high benefits and premiums.