The Demand for Episodes of Medical Treatment in the Health Insurance Experiment

This report contains a statistical and economic analysis of data on the demand for medical care from the RAND Health Insurance Experiment, a large-scale social experiment designed to assess how varying patients' cost of health services affects their use of services and their health status. The report presents final results for medical spending organized by episodes, an effective and fairly new approach to the study of demand. It also presents results from a new model that uses statistical estimates to simulate spending on episodes of treatment by a representative group of families. A major finding is that price affects the number of episodes chosen by participants and has much smaller effects on the cost of each episode. The simulation results show that small deductibles can be effective in restraining demand, and that individual caps on out-of-pocket spending need not exceed $1,000 per year to eliminate most overuse. Large deductibles greatly increase financial risk without substantially reducing excess use. Individual deductibles are generally preferable to family deductibles.