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 future health status  Demand response and HMO

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: Nov, 1974-Feb, % 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

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: 8 millions  Benefit?