Evaluating Rationality in Responses to Health Insurance Cost-Sharing: Comparing Deductibles and Copayments [JMP]


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.

Last updated on 11/13/2016