1. 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.

2. 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

3. 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

4. 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

5. 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)

12. 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

13. Four part equations

21. 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%)

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

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

27. 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

30. 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.

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

35. 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