Premium Levels and Demand Response in Health Insurance: Relative Thinking and Zero-Price Effects

Abstract

In health care systems with a competitive health insurance market, governments or other sponsors (e.g. employers) often subsidize premiums to encourage enrolment. These subsidies are typically independent of plan choice leaving the absolute premium differences in place so as not to distort consumer choice of plan. Such subsidies do, however, change the relative premium differences across plans, which, according to theories from behavioral economics, can affect choice. Consumers might be sensitive to differences relative to a reference premium ("relative thinking"). Furthermore, consumers might be particularly sensitive to a reference premium of zero ("zeroprice effect"), a relevant range for some subsidized health insurance markets. This paper tests these ideas with two sources of evidence. We argue that observed equilibria in Germany and the U.S. Medicare Advantage markets are consistent with a powerful zero-price effect, resulting in an equilibrium focal pricing at zero. This contrasts with the Netherlands where equilibrium premiums are well above zero. In an empirical test using hypothetical questions in a web-based survey in these three countries, we also find evidence for both a relative thinking and a zero-price effect in the demand for health insurance. Our findings imply that well-designed subsidies can leverage relative thinking to increase demand elasticity for health plans. Creation of a powerful reference price (e.g., at zero), however, risks subverting price competition.

Free for Children? Patient Cost-Sharing and Healthcare Utilization

“…Our result is consistent with the "zero-price" effect discussed in the literature on behavioral economics, according to which people may be particularly sensitive to the price of zero (e.g., Shampanier et al 2007;Douven et al 2017). The underlying idea is that people strongly perceive the benefits associated with free products because of the utility loss related to giving up the free product (Hossain and Saini 2015).…”

Analysis of Drivers of Disenrollment and Plan Switching Among Medicare Advantage Beneficiaries

“…32,33,37 Beyond 2014 premiums, we included a flag of enrollment in the lowest premium and MOOP or highest star rating available in the country and net change in rating, premium, and MOOP between an enrollee's 2014 plan and that plan in the following year to see how changes in plan characteristics influence decisions. 41 We include MA star ratings that range from 2.0 to 5.0 stars in 0.5-star increments and are calculated annually at the contract level by CMS across 5 domains of quality and enrollee experience. 42 We grouped contract star ratings into 2.0 to 2.5, 3.0 to 3.5, 4.0 to 4.5, and 5.0.…”

Consumer price sensitivity and health plan choice in a regulated competition setting

“…First, the estimates reported in Table 3 are roughly constant across all specifications and, more importantly, the estimates are very close to the overall effect based on raw means as shown in Table 2. Zero-price options are not only very attractive to consumers but the change in relative prices might also have been much more pronounced than in our case (see, e.g., Douven et al, 2017). We are therefore confident that the variation in health plan premiums is exogenous.…”

“…(see Douven, van der Heijden, McGuire, & Schut, 2017), these results are not directly applicable to most regulated competition markets. Furthermore, the majority of studies considers employer-sponsored insurance.…”