A Dynamic Model of Health Insurance Choices and Healthcare Consumption Decisions

Chronic diseases, which account for 75% of healthcare expenditure, are of particular importance in trying to understand the rapid growth of healthcare costs over the last few decades. Individuals suffering from chronic diseases can consume three types of services: secondary preventive care, which includes diagnostic tests; primary preventive care, which consists of drugs that help prevent the illness from getting worse; and curative care, which includes surgeries and expensive drugs that provide a quantum boost to the patient’s health. Although the majority of cases can be managed by preventive care, most consumers opt for more expensive curative care that leads to a substantial increase in overall costs. To examine these inefficiencies, we build a model of consumers’ annual medical insurance plan decisions and periodic consumption decisions and apply it to a panel data set. Our results indicate that there exists a sizable segment of consumers who purchase more comprehensive plans than needed because of high uncertainty vis-à-vis their health status, and that once in the plan, they opt for curative care even when their illness could be managed through preventive care. We examine how changing cost-sharing characteristics of insurance plans and providing more accurate information to consumers via secondary preventive care can reduce these inefficiencies.