By Tal Gross, Timothy Layton & Daniel Prinz
National Bureau of Economic Research, October 2020
Some consumers lack the cash needed to pay for medical care. As a result, they either delay care until they can pay for it or they forgo the care altogether. To test for such a possibility, we study the distribution of monthly Social Security checks among Medicare Part D enrollees. When Social Security checks are distributed, prescription fills increase by 6-12 percent. In that sense, drug consumption of low-income Medicare recipients is “liquidity sensitive.” We then study recipients who transition onto a program that eliminates copayments. When those recipients do not face copayments, their drug consumption becomes less liquidity sensitive. That finding implies that, beyond risk protection, generous insurance also provides recipients with the ability to consume healthcare when they need it rather than when they have cash. Further, we find that recipients whose drug consumption is most liquidity sensitive exhibit price elasticities of demand that are twice the size of the average elasticity, suggesting that more-generous insurance causes recipients both to re-time prescription filling and also to start filling prescriptions that they otherwise would not fill. We present a stylized model that uses this finding to call into question the conventional interpretation of demand-response to price as solely inefficient moral hazard.
From the Introduction
There exists broad agreement among economists that health insurance ought to involve some form of cost sharing: copayments, coinsurance rates, or deductibles. Theory suggests that cost sharing can limit moral hazard (Zeckhauser, 1970), and empirical evidence confirms that cost sharing reduces spending (Manning et al., 1987; Aron-Dine et al., 2013; Shigeoka, 2014; Brot-Goldberg et al., 2017). Indeed, motivated by that evidence, high-deductible health insurance plans have become increasingly common in the United States.
Those cost-sharing mechanisms may introduce a particular challenge for low-income consumers. A large literature suggests that many low-income households wait to consume until their income arrives. Olafsson and Pagel (2018), for instance, find that low-income consumers purchase 70 percent more goods on days when they receive their paychecks. That finding is consistent with many other studies: consumption responds to both predictable and unanticipated changes in income. One might call such a pattern “liquidity sensitivity:” consumers often delay many of their purchases until their income arrives.
From the Conclusion
The results above suggest that Medicare Part D recipients delay the purchase of prescription drugs until their Social Security checks arrive. We estimate a 10–12-percent increase in prescription fills among low-income recipients facing subsidized copayments on the day that their checks arrive. Even among the general Part-D population that receives no subsidies, prescription fills increase by roughly 6 percent on Social Security paydays.
Those increases in prescription fills upon payday diminish when recipients’ copayments are reduced. In addition, we use the transition to lower copayments to estimate a price-elasticity of demand. Recipients who tend to fill their prescriptions on their Social Security paydays exhibit a much higher elasticity of demand.
The results thus suggest that discussions over cost-sharing mechanisms need to go beyond the traditional trade-off between moral hazard and risk protection. Some low-income consumers exhibit healthcare consumption that is “liquidity sensitive,” and so cost sharing leads to additional complications for them.
More generally, this paper emphasizes an additional benefit of full insurance. Full insurance not only reduces the uncertainty faced by consumers. It also allows low-income recipients’ consumption to be less sensitive to their liquidity. Liquidity sensitivity may be even more of an issue for other populations beyond Medicare recipients. For instance, consider adults who lack stable employment and thus face volatile incomes. That population does not have to wait a few weeks for a Social Security check—they may wait months for work. For them, full insurance allows the smoothing of healthcare consumption between employed and unemployed states. But for any population, the timeliness of healthcare consumption can have medical consequences. And so making healthcare consumption less liquidity sensitive ought to be a worthwhile policy goal.
By Don McCanne, M.D.
This emphasis on consumerism in health care – making patients sensitive to the costs of health care by requiring out-of-pocket payment of deductibles, copayments, or coinsurance – is based on the concept that it is a “moral hazard” to use insurance to pay health care costs in full when that “hazard” can be avoided by requiring patients to pay a portion of the costs out-of-pocket so then they will accept only the care that they really need and are willing to pay for.
This study shows that low-income patients will delay or avoid care – in this case prescription drugs – when they do not have the funds needed for cost-sharing, though they will often obtain that care once they receive their Social Security checks. This suggests that we should redefine “moral hazard.” Rather than defining it as health care that might be declined if patients had to pay for it, we should define moral hazard as a barrier – a hazard – that policy wonks erect that is designed to save costs by preventing patients from receiving care that they should have since it was recommended by their physicians. That’s not a moral compromise; that’s a moral failure.
So now the policy community is dishing out policies based on “liquidity sensitivity.” Liquidity sensitivity comes into play when out-of-pocket health care costs exceed an individual’s discretionary income – an event much more likely to occur with lower-income individuals – though larger deductibles can also exceed the discretionary income of middle-income individuals.
Most individuals who support health care reform support reform that is equitable – fair for everyone. It would be far more equitable to eliminate cost-sharing and thus avoid liquidity sensitivity for those without higher incomes, while, at the same time, fund the entire health care system with equitable, progressive taxes. Now that’s fair.
Consumer-directed health care, moral hazard, liquidity sensitivity – let’s dump those in the trash bin of health policy concepts representing moral failure. Regular readers already know that we can fix this with a well designed, single payer, improved Medicare for All. Let’s do it!
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