A Dynamic Model of Medical Care Consumption during the Health Insurance Year

This paper models individual medical care consumption over an insurance year, explicitly accounting for variations in the effective price of medical care due to several characteristics of the health insurance contract. We explain behavior during the health insurance year by solving and estimating a stochastic, discrete choice, dynamic optimization problem that characterizes an individual’s decision to consume care in periods of illness and wellness. The solution provides probabilities of curative and preventive treatment, of illness, of medical care charges, and of health insurance plan choice. Using the estimated structural parameters of the individual’s optimization problem we are able to predict behavior under alternative cost-sharing provisions of endogenous health insurance contracts.