Price and Income Elasticity of the Demand for Health Insurance and Health Care Services: A Critical Review of the Literature

Resolving the national debate on the affordability of health care is likely to turn, at least in part, on the question of how consumer demand for health insurance and health care services responds to changes in price or income. Estimates of responsiveness—measured as price and income elasticities—are often used to develop and analyze proposals to expand access to health insurance or constrain the growth in health care expenditures. The price and income elasticities measured in the RAND Health Insurance Experiment (HIE) of the 1970s remain a widely used source of elasticity estimates with respect to the demand for covered health care services. However, these estimates may fail to support today's analyses of health care utilization. Indeed, more recent anecdotal evidence and estimates suggest that the demand for some major components of health care—for example, prescription drugs and mental health services—may have changed significantly in the past 30 years. Furthermore, the HIE did not envision the emergence of important health insurance plan designs and strategies that are common today, such as differences in cost sharing for different medical services in health insurance plans (e.g., reduced cost sharing for preventive care or tiered formularies for prescription drugs) and the use of managed care techniques. In addition, there is no single reference point for elasticity estimates with respect to the demand for health insurance like the ones measured in the HIE for health care services. The range of elasticity estimates in the research literature appears to support the notion that there would be wide variation the estimated response to public policy proposals that would reduce the price of insurance to encourage greater coverage. This report reviews more than 80 recent studies that produced estimates of the elasticity of demand for health insurance and health care services. It identifies gaps in the available estimates, and also in the science of estimating demand elasticities. All these studies are more recent than the HIE, and most were conducted since 1990. The research literature indicates that the demand for health insurance is, in general, price-inelastic. That is, a percentage change in the price of insurance—to employers, employees, or individuals in the nongroup market—evokes a smaller percentage change in demand. However, the range of estimated elasticities is wide. Specifically: • Estimates of the price elasticity of employer offer range from –0.14 to –5.8, but they hover around –0.6. Small firms are less likely to offer insurance, and their …