The Journal of Risk and Insurance O The Journal of risk and Insurance, 2010, Vol 77, No 1, 129-144 DO:10.11/1539-6975200901335X IMPLICATIONS OF THE NTERACTION BETWEEN INSURANCE CHOICE AND MEDICAL CARE DEMAND Richard dusansky Ko ABSTRACT The gross price elasticity of demand for medical care is decomposed into wo separate observable components: the medical care gross price elasticity of insurance choice and the cost-sharing elasticity of medical care. When con- sumers alter their choice of health-care plans, the price elasticity of medical care is no longer equivalent to the cost-sharing elasticity; using the latter as a proxy for the former may produce misleading results. We present condi tions under which the medical care price elasticity is positive, the case of a quasi-Giffen good, and provide a theoretical foundation for extant empirical findings of a positive medical care price elasticity of insurance demand INTRODUCTION Among the developed, higher-income countries, medical care expenditures have been rising at a pace that is distinctly above overall growth rates. In the United States, for example, total medical cost outlays have increased at an average rate of 8.9 percent since 1980, which is about 2.6 percentage points above the average for the aggregate economy, as measured by gross domestic product(GDP). Similar patterns prevail when one examines medical expenditures in both per capita and budget share terms As a share of the U.S. economy, medical care has nearly doubled over the 25-year period 1980 to 2005, rising from 9 percent of GDP in 1980 to 16 percent in 2005.2 Medical care spending per ca has also increased dramatically during this period, expenditure leader, similar trends exist in most developed countries, ?T the medical increasing to $6,697 from $1, 102. Although the United States is by These observations prompt interest in the forces underlying medical care demand and in how individuals respond to its rising costs. In this article, we analyze con sumer medical care demand response to a change in the gross price of medical care, paying special attention to the interaction between the consumer's demand for Richard dusansky is with the Department of Economics, University of Texas at Austin. Cagatay Koc is with the Department of Economics, University of Texas at Arlington. Dusansky can be contacted via e-mail: dusansky @eco. utexas. edu 1 Centers for Medicare and Medicaid Services 2 Centers for Medicare and Medicaid Services 3 Centers for Medicare and Medicaid Services 4 Kaiser Family Foundation 129C The Journal of Risk and Insurance, 2010, Vol. 77, No. 1, 129-144 DOI: 10.1111/j.1539-6975.2009.01335.x IMPLICATIONS OF THE INTERACTION BETWEEN INSURANCE CHOICE AND MEDICAL CARE DEMAND Richard Dusansky C¸ agatay Koc ˘ ¸ ABSTRACT The gross price elasticity of demand for medical care is decomposed into two separate observable components: the medical care gross price elasticity of insurance choice and the cost-sharing elasticity of medical care. When con￾sumers alter their choice of health-care plans, the price elasticity of medical care is no longer equivalent to the cost-sharing elasticity; using the latter as a proxy for the former may produce misleading results. We present condi￾tions under which the medical care price elasticity is positive, the case of a quasi-Giffen good, and provide a theoretical foundation for extant empirical findings of a positive medical care price elasticity of insurance demand. INTRODUCTION Among the developed, higher-income countries, medical care expenditures have been rising at a pace that is distinctly above overall growth rates. In the United States, for example, total medical cost outlays have increased at an average rate of 8.9 percent since 1980, which is about 2.6 percentage points above the average for the aggregate economy, as measured by gross domestic product (GDP).1 Similar patterns prevail when one examines medical expenditures in both per capita and budget share terms. As a share of the U.S. economy, medical care has nearly doubled over the 25-year period 1980 to 2005, rising from 9 percent of GDP in 1980 to 16 percent in 2005.2 Medical care spending per capita has also increased dramatically during this period, increasing to $6,697 from $1,102.3 Although the United States is by far the medical expenditure leader, similar trends exist in most developed countries.4 These observations prompt interest in the forces underlying medical care demand and in how individuals respond to its rising costs. In this article, we analyze con￾sumer medical care demand response to a change in the gross price of medical care, paying special attention to the interaction between the consumer’s demand for Richard Dusansky is with the Department of Economics, University of Texas at Austin. C¸ agatay ˘ Koc¸ is with the Department of Economics, University of Texas at Arlington. Dusansky can be contacted via e-mail: dusansky@eco.utexas.edu 1 Centers for Medicare and Medicaid Services. 2 Centers for Medicare and Medicaid Services. 3 Centers for Medicare and Medicaid Services. 4 Kaiser Family Foundation. 129