Optimal Health Insurance Design with Behavioral Hazard: When the First Dollar Matters

When deductibles and coinsurance apply, many people are myopic, focusing on what they must pay today and underweighting how current spending lowers future prices. I build a within‑year dynamic model that captures first‑dollar sensitivity and the risk that individuals cut back on important care. Using monthly claims from a large Wisconsin employer and and natural experiments in plan design, I estimate behavioral parameters governing myopic responses. Preliminary results show large reactions to small deductibles, including reductions in use among higher‑risk members, consistent with myopic behavior. Using the estimated model, I compare alternative plan designs and find sizable gains from making the first dollars of care inexpensive while applying moderate cost sharing at higher spending levels.