A Dynamic Structural Analysis of Health Care Service Market with Information Asymmetry

My dissertation provides a dynamic structural analysis of demand and supply in a service market with information asymmetry. Specifically, I examine the health care market, which accounts for 17% of U.S. GDP and arguably is the most personal and important service consumers buy. This industry is particularly interesting for several reasons. First, health care service is very expensive and surpassed $2.6 trillion in 2008. The increase of health care costs is particularly relevant in the context of chronic diseases, which account for 75% of total health care expenditure. In such a context, consumers have two types of health-care consumption choices: preventive care and curative care. Although the vast majority of cases in chronic diseases could be managed by preventive care according to experts, more than 96% of the health care expenditure goes to more expensive curative care. Second, health care market often suffers from adverse selection and moral hazard problems. Firms' profits depend on both the actions and the identity of consumers. Despite the importance of health care service markets, there is relatively little empirical work on demand and firm behavior in such markets. This dissertation focuses on two aspects of health care service markets that have received little attention in the literature: the demand of preventive care and curative care, particularly in the chronic disease context, and the impact of consumers' health status information on insurer pricing behavior. To conduct the empirical analysis, I constructed a comprehensive data set including purchases of insurance plans, health care consumption histories, 2 insurance premium and plan characteristics, and individual demographic information from January 2005 to December 2007. I use this proprietary data to construct econometric models of consumer choices and insurer behavior. First, I attempt to understand why many consumers opt for more expensive curative care which leads to a significant increase in the health care costs, but only a marginal increase in their welfare. To do so, I build a dynamic structural model of how consumers choose between different insurance plans, and conditional on the insurance plans, how they make the health care consumption decisions. I use the model to investigate the observed health care consumption pattern. The results reveal the following insights: (i) while preventive care mainly provides information about the health status (informative effect), curative care mainly improves the current health status (investment effect). (ii) Decreasing deductible or copayment increases frequency of preventive care more as compared to curative …