Insurance-induced moral hazard: A dynamic model of within-year medical care decision making under uncertainty

Abstract Insurance-induced moral hazard may lead individuals to overconsume medical care. Many studies estimate this overconsumption using models that aggregate medical care decisions up to the annual level. Using employer-employee matched data from the Medical Expenditure Panel Survey (MEPS), I estimate the effect of moral hazard on medical care expenditure using a dynamic model of within-year medical care consumption that allows for endogenous health transitions, variation in medical care prices, and individual uncertainty within a health insurance year. I then calculate moral hazard effects under a second set of conditions that are consistent with the assumptions of most annual decision-making models. The within-year decision-making model produces a moral hazard effect that is 24% larger than the alternative model. I also provide evidence of heterogeneous moral hazard effects, particularly between insured and uninsured individuals, and discuss related policy implications. The paper concludes with a counterfactual policy simulation that implements the individual mandate provision of the 2010 Patient Protection and Affordable Care Act. I find that full implementation of the individual mandate decreases the percentage of uninsured individuals in the population being analyzed from 11.8% to 6.0% and increases average medical care expenditure 77% among the newly insured. JEL Classification: C61, D81, G22, I12, I1