At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w21104.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The standard Medicare Part D drug insurance contract is nonlinear-with reduced subsidies in a coverage gap-resulting in a dynamic purchase problem. We consider enrollees who arrived near the gap early in the year and show that they should expect to enter the gap with high probability, implying that, under a benchmark model with neoclassical preferences, the gap should impact them very little. We find that these enrollees have flat spending in a period before the doughnut hole and a large spending drop in the gap, providing evidence against the benchmark model. We structurally estimate behavioral dynamic drug purchase models and find that a price salience model where enrollees do not incorporate future prices into their decision making at all fits the data best. For a nationally representative sample, full price salience would decrease enrollee spending by 31%. Entirely eliminating the gap would increase insurer spending 27%, compared to 7% for generic-drug-only gap coverage.

Theoretical models predict asymmetric information in health insurance markets may generate inefficient outcomes due to adverse selection and moral hazard. However, previous empirical research has found it difficult to disentangle adverse selection from moral hazard in health care. We empirically study this question by using data from the Health and Retirement Study to estimate a structural model of the demand for health insurance and medical care. Using a two-step semi-parametric estimation strategy we find significant evidence of moral hazard, but not of adverse selection.

For-profit hospitals in California contract out services much more intensely than either private nonprofit or public hospitals. To explain why, we build a model in which the outsourcing decision is a trade-off between net revenues and some non-monetary benefit to the manager, or "bias" in the manner of production. Since nonprofit firms must consume profits under restrictions, they trade off bias and income differently than forprofit firms. This difference is exaggerated in services where the benefits of controlling the details of production are particularly important but minimized when firms are hit with a fixed-cost shock. We test these predictions in a panel of California hospitals, finding evidence for each. These results suggest that a model of public or nonprofit make-or-buy decisions should be more than a simple relabeling of a model derived in the for-profit context. JEL Classification: I11, L24, L33

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Theoretical models predict asymmetric information in health insurance markets may generate inefficient outcomes due to adverse selection and moral hazard. However, previous empirical research has found it difficult to disentangle adverse selection from moral hazard in health care consumption. We propose a two‐step semiparametric estimation strategy to identify and estimate a canonical model of asymmetric information in health care markets. With this method, we can estimate a structural model of demand for health care. We illustrate this method using a claims‐level data set with confidential information from a large self‐insured employer. We find significant evidence of moral hazard and adverse selection.

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When a firm offers health benefits to workers, it exposes the firm to the risk of making payments when workers get sick. A firm can either pay health expenses out of its general assets, keeping the risk inside the firm, or it can purchase insurance, shifting the risk outside the firm. We analyze the firm's decision to manage this risk. Using data on the insurance decisions of publicly-traded firms, we find that smaller firms, firms with more investment opportunities, and firms that face a convex tax schedule are more likely to hedge the risk of health benefit payments. Health risk is common to all firms, making this application an important contribution to understanding firms' hedging decisions. Additionally, we reveal new and important determinants of the hedging decision relative to regulatory regimes. We also show that hedging health risk mitigates investment-cash flow sensitivities.JEL Classification: G3, I13