Evaluating Rationality in Responses to Health Insurance Cost-Sharing: Comparing Deductibles and Copayments

Many studies find that consumers reduce spending in response to higher health insurance cost-sharing, but there is mixed evidence as to whether these spending reductions reflect a rational trade-off between health benefits and costs. This paper provides new evidence on the rationality of consumer responses to cost-sharing using novel variation in two common types of cost-sharing incentives: deductibles and copayments. Economic theory predicts that a fully informed, rational consumer would respond equivalently to a marginal dollar in out-of-pocket (OOP) costs from all types of cost-sharing incentives. In contrast, I find that consumers are substantially more responsive to copayment than to deductible OOP costs. Further, both types of cost-sharing have negative cross-price effects onto non-targeted services. These results are consistent with barriers to consumers’ understanding how different types of cost-sharing translate into OOP costs. Finally, I show that both deductibles and copayments reduce adherence to highly valuable chronic medications. Together, my findings indicate that copayment-based plans may be more effective in protecting consumers from high OOP costs while achieving significant spending reductions, and that more complex plans may not result in the outcomes intended. ∗Harvard University, Department of Economics, Cambridge, MA; email: [email protected]. A special thanks to my dissertation committee: David Cutler, Amitabh Chandra, and Nathan Hendren. I also thank seminar participants at Harvard University, the National Bureau of Economic Research, and the American Society of Health Economists Biennial Conference. I am grateful for support from the National Institute on Aging Grant No. T32AG000186 (via the National Bureau of Economic Research) and the National Science Foundation Graduate Research Fellowship Grant No. DGE-1144152.