Moral Hazard in Health Insurance: Do Dynamic Incentives Matter?

Abstract

Using data from employer-provided health insurance and Medicare Part D, we investigate whether health care utilization responds to the dynamic incentives created by the nonlinear nature of health insurance contracts. We exploit the fact that because annual coverage usually resets every January, individuals who join a plan later in the year face the same initial (“spot”) price of health care but a higher expected end-of-year (“future”) price. We find a statistically significant response of initial utilization to the future price, rejecting the null that individuals respond only to the spot price. We discuss implications for analysis of moral hazard in health insurance.