Department of Economics and Business Economics

Spot price biases in non-linear health insurance contracts

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We study an apparent schism in the literature concerned with non-linear health insurance plans: consumers exposed to the same type of policy appear forward-looking and rational in their response to one policy feature – the end-of-year coverage reset – but not to another – that current prices depend on the year-to-date spending in a non-linear fashion. We exploit policy variation from within a unified institutional environment and uses of population-wide data. We replicate both phenomena empirically: consumers both shift the timing of their purchases in response to the end-of-year reset and react excessively to spot prices during the coverage year. Importantly, however, we show that also the end-of-year behavior is due to over-attention to short-run prices. Specifically, consumers respond entirely to the large and salient change in the spot price in connection with the reset of the coverage year, conditional on the true expected price change. We find that liquidity constraints, rather than plan literacy and cognitive decline are important for understanding the spot price bias.

Original languageEnglish
Article number104508
JournalJournal of Public Economics
Volume203
Number of pages15
ISSN0047-2727
DOIs
Publication statusPublished - Nov 2021

Bibliographical note

Publisher Copyright:
© 2021 Elsevier B.V.

    Research areas

  • Intertemporal shifting, Non-linear pricing, Prescription drugs

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