Implications of the Interaction Between Insurance Choice and Medical Care Demand

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 consumers 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 conditions 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. Copyright (c) The Journal of Risk and Insurance, 2010.