The Economics of Consumer Directed Health Care

This paper presents a model of consumer directed health care, high deductible insurance plans. Insurance companies in a competitive market offer such plans; higher deductibles result in lower premiums. Such changes affect consumers’ decisions on preventive care. I show that preventive care may or may not increase when consumers face more risk and lower premium. Furthermore, I look at selection and cross subsidization when insurance firms offer both conventional, low-deductible plans and high-deductible plans. The extent of cross subsidization may be reduced. I also examine the moral hazard effect of higher deductible plans. Consuming more health care early within a fiscal year carries an option value. Once the deductible is reached, consumers’ out-of-pocket prices are significantly lowered. Consumers have an incentive to consume more because of the option value of reduced prices later within a fiscal year. The paper also contains a survey of recent empirical findings on consumer directed health care.