INSURANCE-INDUCED MORAL HAZARD: A DYNAMIC MODEL OF WITHIN-YEAR MEDICAL CARE DECISION MAKING UNDER UNCERTAINTY

This study quantifies the moral hazard effect of health insurance on medical expenditure by estimating a dynamic model of within-year medical care consumption that allows for insurance selection, endogenous health transitions, and individual uncertainty about medical care prices in an environment where insurance has nonlinear cost-sharing features. The results suggest that moral hazard accounts for 53.1%, on average, of total annual medical expenditure when insured. This estimate is significantly different, and generally larger, than that produced by an alternative model that is representative of the annual medical care decision-making models commonly found in the literature.