Medical bill shock and imperfect moral hazard

One of the goals of cost sharing (e.g., copayments, deductibles) is to decrease moral hazard. In other words, if a good is free (or lower cost), you’ll consume more of it than if you had to pay for all of it out-of-pocket. One challenge in health care ours that prices are not transparent. How much your insurer is paying your hospital or doctor varies a lot depending on negotiated rates. Then how much you as a patient pay depends on the benefit design of your plan. In short, the link between the prices pay and behavior may be mitigated because these prices are unclear to consumers.

A paper by Anderson et al. (2024) (with the same title as this blog post) aims to examine how delays between medical service provision and patient payment impacts consumption decisions. While about 60% of medical bills are being paid by insurers within the first four weeks, of service provision, the remainder take more than a month for payment to be settled, creating a lot of uncertainty. The authors use data from 2006-2018 Merative Marketscan Commercial claims data and focus on CMS ‘shoppable services’ (see White and Eguchi for a definition) to avoid cases of care provided to address and emergency condition. The examine how medical bills impact household spillover spending after utilizing shoppable services. They find that:

Households increase spending by 22% after a scheduled service, but then reduce spending by 11% after the bill arrives. Observed bill effects are consistent with resolving price uncertainty; bill effects are strongest when pricing information is particularly salient. A model of demand for healthcare with delayed pricing information suggests households misperceive pricing signals prior to bills, and that correcting these perceptions reduce average (median) spending by 16% (7%) annually.

Part of the reason why this delay impacts spending behavior is because patients may be unsure if they will hit their annual deductible or not.

The authors also note that their model “…does not rely on consumer inattentiveness to past consumption, but underscores the role of delayed information arising from complex contracts involving multiple parties.”

You can read the full paper here.