Medical Bill Shock and Imperfect Moral Hazard

Consumer sensitivity to medical prices is a central problem in health insurance design. However, delays in when consumers receive price information may create distortions in consumption decisions. We study how a scheduled medical service generates spillover household spending before and after a medical bill arrives, leveraging variation in the time an insurer takes to process a claim. Immediately after services, non-diagnosed household spending increases by 60%; however, a bill’s arrival causes a spending reduction of 8.5%, nearly 15% of the increase. These reductions are a result of price uncertainty, rather than other information frictions. Bills also affect not only strategic delays in care, but also where consumers seek care even for non-delayable services. We model how households form beliefs about marginal prices when information is delayed. Households overestimate their expenditures by 10% before bills arrive, leading to an over-consumption; novel plan designs—such as shortening deductible periods—may reduce over-consumption.

Read the full paper here!