Myopia and Moral Hazard in Health Insurance

Health insurance deductibles are designed to reduce medical spending by exposing consumers to higher upfront prices. I provide a formal analysis of what I term a ``deductible paradox”: within the standard forward-looking model of cost sharing, raising the deductible can paradoxically increase optimal spending for consumers who anticipate reaching the out-of-pocket maximum. When the model does predict a decline in utilization, it implies that small deductible increases should generate only modest reductions in spending. I test these predictions using quasi-experimental variation from Wisconsin’s introduction of a modest deductible in its previously zero-deductible health plan. Spending falls far more than the benchmark model can rationalize, with the largest reductions among high-risk enrollees who should respond least. To account for these patterns, I develop a behavioral dynamic model in which households respond myopically to spot prices and face billing delays. This behavioral model better matches both the magnitude and the risk gradient of the observed spending response, highlighting the central role of spot-price responses in shaping the impact of deductible changes.