Making your health insurance less generous can actually make you spend more money.
Conventional wisdom says that if you make patients pay more, they’ll use less healthcare. But this paper finds the opposite: when insurance becomes 'stingier,' patients actually accelerate their spending so they can hit their out-of-pocket maximums as fast as possible. Once that cap is hit, the healthcare becomes 'free' for the rest of the year, leading to a surge in total spending. It’s a rational response to a system designed to discourage use. For policy makers and employers, it means that trying to save money by cutting benefits might actually blow a hole in the budget.
The Generosity Paradox: When Less Generous Insurance Raises Spending
SSRN · 6496541
This paper shows that standard models of moral hazard predict a generosity paradox : less generous insurance can increase rather than decrease medical spending. Higher cost sharing makes it easier to reach the out-of-pocket maximum, where the marginal price is zero. Forward-looking consumers near that threshold therefore optimally increase their spending to reach the maximum. Using existing empirical estimates of the health need distribution and moral hazard responsiveness, I find that in many r