Willard G. Manning et al. (1987) June 1, 2007 Willard G. Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment Willard G. Manning et al. (1987) June 1, 2007 Willard G.

Question: Demand response The size of demand response Demand response and income Demand response and age group Demand response and different services Demand response and HMO Health use and health status

Problems People who face lower price use more health care → demand response But in reality Insurance (e.g. choices of different co-payment rate) is endogenous People who face lower price use more health insurance People who need more use more health insurance Bias in the estimation

Solutions: random experiment People cannot choose what they want. They are randomly assigned to different insurance programs Thus No self-selection No income effect Pure moral hazard problem

Experiment Design Time: Observations: Insurance: Nov, 1974-Feb, 1977 70% for 3 years and 30% for 4 years Observations: 5809 persons from six cities (FFS) 1982 (HMO) Insurance: Coinsurance rate: 0, 25, 50, 95 Upper limit: 5,10,15 (income) Annual Maximum Out-pocket expense (MDE): 1000 Individual deductible – 95% coinsurance rate for outpatient, and free for inpatient care (has upper limit)

Statistical Methods Three characteristics of distribution of medical expenses: A large proportion use no medical services. Medical expense is highly skewed. Distribution is different between outpatient and inpatient use Methods ANOVA Four part equations

Four part equations

Results (I) Large medical increase when co-payment rate moves from 25% to 0%; but a much smaller increase when moving from 95% to 50% or 50% to 25% Total Exp (0%)~1.5 Total Exp (95%)

Results (II) EXP(In) does not change with coinsurance rate EXP(Out) increases significantly when coinsurance rate moves from 0 to 25%

Results (III) No large demand response on inpatient service U shape expenditure: probably due to the upper limit

Results (IV) Children are less responsive for inpatient care. Adults have significant lower use of inpatient services on the family-pay plans than on the free plan. For other subgroups, for example, health status (healthy v.s. sick), there is no evidence to show the differential response to health insurance coverage between these two subgroups

Results (IV) Health status outcome: Patients with relatively prevalent chronic problems (high blood pressure, myopia) have specific gains in use of free FFS rather in use plans with cost sharing. HMO results (table 7): Same rate of using service among the plans. The participants with one or more hospital admissions differs with plans.

Random experiment Is it worth it? Cost: 80 millions Benefit?

Was it worth it? Rand Health Insurance Experiment cost $80 million Initial results published in 1981 In the next 2 years, # of insurance companies with first-dollar coinsurance for hospital care increased from 30% to 63% # of insurance companies with annual deductible of $200 per person increased from 4% to 21% Estimated cost saving from the demand for medical care = $7 billion Government sponsored studies often yield important knowledge for business