manning_randhie - American Economic Association Health...

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American Economic Association Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment Author(s): Willard G. Manning, Joseph P. Newhouse, Naihua Duan, Emmett B. Keeler, Arleen Leibowitz Reviewed work(s): Source: TheAmericanEconomicReview, Vol. 77, No. 3 (Jun., 1987), pp. 251-277 Published by: American Economic Association Stable URL: . Accessed: 06/01/2012 17:30 . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected] American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The American Economic Review.
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Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment By WILLARD G. MANNING, JOSEPH P. NEWHOUSE, NAIHUA DUAN, EMMETT B. KEELER, ARLEEN LEIBOWITZ, AND M. SUSAN MARQUIS* We estimate how cost sharing, the portion of the bill the patient pays, affects the demand for medical services. The data come from a randomized experiment. A catastrophic insurance plan reduces expenditures 31 percent relative to zero out-of-pocket price. The price elasticity is approximately - 0.2. We reject the hypothesis that less favorable coverage of outpatient services increases total expenl- diture (for example, by deterring preventive care or inducing hospitalization). Over the past four decades medical care costs have grown about 4 percent per year in real terms, and the share of GNP devoted to medical care has increased from 4.4 percent in 1950 to 10.7 percent in 1985 (Daniel Waldo, Katherine Levit, and Helen Lazenby, 1986). A prominent explanation of this rapid increase has emphasized the spread of health insurance, which has generated demand for both a higher quality and an increased quan- tity of medical services (Martin Feldstein, 1971, 1977). In turn, the spread of health insurance has been linked to the exemption of employer-paid health insurance premiums from the individual income tax (Feldstein and Elizabeth Allison, 1974; Feldstein and Bernard Friedman, 1977; Mark Pauly, 1986). Thus, the increase in expenditure is often portrayed as a type of market failure in- duced by public policy, although such an argument is not universally accepted (Morris Barer, Robert Evans, and Gregory Stoddart, 1979; Robert Evans, 1984; John Goddeeris and Burton Weisbrod, 1985). No one has shown, however, that the
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manning_randhie - American Economic Association Health...

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