Spot price biases in non-linear health insurance contracts

• Published in: Journal of public economics 2021-11, Vol.203, p.104508, Article 104508
• Main Authors: Simonsen, Marianne, Skipper, Lars, Skipper, Niels, Christensen, Anne Illemann
• Format: Article
• Language: English
• Subjects: Intertemporal shifting; Non-linear pricing; Prescription drugs
• ISSN: 0047-2727; 1879-2316
• DOI: 10.1016/j.jpubeco.2021.104508

•Consumers purchase in anticipation of end-of-year reset of health insurance plan.•Consumers react excessively to spot prices during coverage year.•End-of-year response is due to large change in spot price at coverage year reset.•End-of-year response is not driven by true expected price change.•Liquidity constraints are important for understanding the spot price bias. We study an apparent schism in the literature concerned with non-linear health insurance plans: consumers exposed to the same type of policy appear forward-looking and rational in their response to one policy feature – the end-of-year coverage reset – but not to another – that current prices depend on the year-to-date spending in a non-linear fashion. We exploit policy variation from within a unified institutional environment and uses of population-wide data. We replicate both phenomena empirically: consumers both shift the timing of their purchases in response to the end-of-year reset and react excessively to spot prices during the coverage year. Importantly, however, we show that also the end-of-year behavior is due to over-attention to short-run prices. Specifically, consumers respond entirely to the large and salient change in the spot price in connection with the reset of the coverage year, conditional on the true expected price change. We find that liquidity constraints, rather than plan literacy and cognitive decline are important for understanding the spot price bias.