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Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment
Willard G. Manning, Joseph P. Newhouse, Naihua Duan, Emmett B. Keeler, Arleen Leibowitz
This randomized experiment explores the effect of cost-sharing on the demand of medical care. This study uses data from the Rand Health Insurance Experiment, where patients were randomly assigned to groups with different levels of coinsurance ranging from 0% to 95%. Results show that lower out-of-pocket expenses (i.e. lower co-insurance rate) lead to higher health expenses. Specifically, the 0% coinsurance group had expenses per capita 45% higher than the 95% co-insurance group. The biggest difference occurs between the 0% and 25% groups.
The results show that an effective policy to decrease health expenditures may be to increase co-insurance (or other cost-sharing) mechanisms. Specifically, introducing a basic level of cost-sharing to policies that have none may be the most effective procedure.