Insurance Benefits, Out-of-Pocket Payments, and the Demand for Medical Care

A Review of the Literature

by Joseph P. Newhouse

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Numerous studies are reviewed that relate the demand for medical care services to variation in out-of-pocket payments. Medical care services include physician, hospital, dentist, and drugs. For all these services demand increases as out-of-pocket payments fall, but the exact magnitude of the response is somewhat uncertain. Although some believe that eliminating out-of-pocket payments for ambulatory services decreases hospitalization and decreases overall costs, the preponderance of evidence suggests the contrary. Evidence from the Medicare and Medicaid programs and from Canada supports the hypothesis that demand responds to variation in out-of-pocket payments.

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