Question

Explain why provision of health insurance (50 % coinsurance rate) makes demand for health care more price inelastic

Answer 1

This report reviews the health economic research conducted at
RAND and elsewhere in an effort to summarize what this research
has to say about the elasticity of demand for health care and to consider how this set of results applies to the problem of estimating the
demand for health care that is provided by the Department of
Defense to military members, their families, and retirees.
The work reported here was sponsored by PA&E and was carried out
jointly by RAND Health’s Center for Military Health Policy Research
and the Forces and Resources Policy Center of the National Defense
Research Institute. The latter is a federally funded research and development center sponsored by the Office of the Secretary of
Defense, the Joint Staff, the unified commands, and the defense
agencies.
Understanding the effects of changes in health insurance policies on
the demand for health care services is an important and timely topic.
As the Military Health System (MHS) has evolved over time, it has
begun to adopt cost-containment strategies that have been tested in
private health plans. These strategies have led to changes in many
aspects of the health care services offered to Department of Defense
(DoD) beneficiaries. Each change potentially can affect the number
of people accessing services, the intensity of use, and the cost to the
DoD. The goal of this report is to summarize the research relevant
for considering the effects of policy changes on the demand for DoD
health care services and associated costs.Although the price elasticity of demand for medical care in general is
relatively low, certain types of care are found to be somewhat more
price sensitive. Preventive care and pharmacy benefits are among
those medical services with larger price elasticities. The finding that
the demand for preventive care is more price sensitive than the demand for other types of care is not surprising. The number of available substitutes for a product is a major determinant of demand
elasticity. In the case of preventive care, a number of goods and services could possibly serve as substitutes. As a result, when the price
of care increases, consumers are able to substitute away from preventive care toward other goods and services that promote health
such as nutritional supplements and healthy foods. In addition, preventive medical services may be seen more as a luxury than a
necessity and, thus, may be put off when the price of such care increases. Further, the opportunity cost of obtaining preventive care is
much higher than it is when the patient is sick, particularly if the illness keeps the individual out of work. It is also likely, that since the
benefits of preventive care accrue in the long-term, they are heavily
discounted. The difference in elasticities may also reflect the fact
that preventive care and prescription drugs are typically not as well
covered by insurance. Policymakers in countries around the world are faced with rising health care costs and are debating ways to reform health care to reduce expenditures. Estimates of price elasticity of expenditure are a key component for predicting expenditures under alternative policies. Using unique individual-level data compiled from administrative records from the Chilean private health insurance market, I estimate the price elasticity of expenditures across a variety of health care services. I find elasticities that range between zero for the most acute service (appendectomy) and -2.08 for the most elective (psychologist visit). Moreover, the results show that at least one third of the elasticity is explained by the number of visits; the rest is explained by the intensity of each visit. Finally, I find that high-income individuals are five times more price sensitive than low-income individuals and that older individuals are less price-sensitive than young individuals.Cost sharing in health insurance schemes is a crucial method that would influence
both health care utilization and financial burden of the insured population. Effects of
cost sharing of health insurance schemes on demand for medical care have been
examined in a number of studies. This review is to describe polices and interventions
of cost sharing in health insurance schemes; and to describe how the authors have assessed effects of cost sharing methods in health insurance schemes where available. This review focuses on studies about methods of cost sharing applied in health insurance schemes. Health insurance schemes refer to any types of health insurance including public health insurance and private health insurance, country-level health insurance and local level health insurance. Cost sharing methods in this review included co-payment, coinsurance and deductible. The mixed methods, including co-payment plus coinsurance, co-payment plus deductible, coinsurance plus deductible, co-payment plus coinsurance and deductible were also included in our review.
Studied populations were target population of cost sharing strategies applied in health insurance schemes. In this review, all types of study design (methods) except opinion paper, letter, news, comment, editorial, bibliography, methodological papers, and resource guides were included. Three types of outcome measures were used in this review, including use of health services or drugs, financial risk, and moral hazard. Cost sharing in health insurance schemes is a crucial method that would influence
both health care utilization and financial burden of the insured population. The economic purpose of health insurance is to reduce financial risk of illness for the insured. Facing decreasing prices of health care paid by the insured, the insured have incentive to increase their health care utilization due to the price elasticity, even if some health services are not necessary (moral hazard). In health insurance schemes,
cost sharing which can take various forms including deductible, co-insurance or
co-payment, and ceiling implies higher out-of-pocket payment from the insured for health service. From demand side, the cost sharing mechanism could prevent users from utilization of health care; from the insurance designers’ side, the cost sharing could control the cost of health insurance scheme by correcting the problem of moral hazard. But too high level of cost sharing may make health insurance loose the function of financial protection. Hence the choice about health insurance involves a trade-off between the gains from risk reduction and losses from the incentive to purchase more health care when insured (moral hazard)(Manning and Marquis 1996). Many studies examined the existence of moral hazard by estimating the change of health care demand after change of cost sharing arrangements (Koc 2005). In Manning’s study (1996), an estimate of optimal co-insurance rate of 45% was derived using empirical data at which the marginal gains from increased pooling equals the marginal loss from increased moral hazard. However, due to the complexity of health insurance scheme, including the design of benefit package, premium level, and characteristics of the insured, optimal demand-side cost sharing level may be difficult to find.