Abstract:
Recent evidence on nonlinear insurance contracts finds that individuals react to the embedded dynamic incentives by changing health care utilization. However, with field data it is difficult to keep the spot price among individuals constant while systematically varying the future price. To do so, we use a controlled laboratory experiment in which subjects are insured by a health plan with a deductible and go through a cycle of periods. In each period they face probabilistic health events and have to choose whether to seek treatment or not. We vary the likelihood of hitting the deductible by varying the number of periods and the height of the deductible, as well as controlling whether subjects receive regular information updates on their remaining deductible. We also elicit individual risk and time preferences. Our results show that varying the future price has a significant effect on spending behavior, regardless of whether the same future price is reached by changing the deductible or the number of periods. At an individual level, we identify perfectly forward-looking as well as perfectly myopic individuals. We find that a relationship between spending on health care and risk preferences, forward-looking behavior and giving information on the height of the deductible.
