The Moral Hazard Effects of Consumer Responses to Targeted Cost-sharing

Published in: Journal of Health Economics, Volume 56, Supplement C (December 2017), Pages 201-221. doi: 10.1016/j.jhealeco.2017.09.012

Posted on on December 07, 2017

by Christopher M. Whaley, Chaoran Guo, Timothy T. Brown

This paper examines the effects of the reference pricing program implemented by the California Public Employees Retirement System (CalPERS) in 2012. The program uses targeted cost-sharing to incentivize patient price shopping. We find that the program leads to a 10.3% increase in the use of low-price providers and reduces the average cost per procedure by 12.5%. We further estimate that the program reduces medical spending by $218.8 per procedure, which we estimate is approximately 53.7% of the excessive spending that is due to patient choice of higher price providers caused by insurance coverage, at the expense of a $94.3 (or 12.5%) reduction in consumer surplus. The cost savings from the reference pricing program is about two to three times as large as the reduction from implementing a high-deductible health plan, while the accompanying consumer surplus reduction is much smaller under reference pricing.

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