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result, simply comparing insured consumers with different levels of cost sharing is likely to

produce an estimate of price elasticity that is biased upwards.

Random assignment of consumers to health plans (as in the HIE) avoids the problem of

adverse selection, but such opportunities to implement a fully experimental design are rare. As a

second-best strategy, researchers have either sought out natural experiments or they have used

various econometric techniques (typically introducing instrumental variables) to deal with self-

selection bias in observational data.

Health Care Prices and Time Prices. As described earlier, measuring the effective prices

that consumers must pay for health care services is complex. It requires the analyst to control for

multiple components of insurance plan design—deductibles, coinsurance rates, and copayment

levels, as well as the scope of covered services. If the research design fails to control for any

relevant component, the elasticity estimate will be biased. In general, omitted variable bias is

likely to produce elasticity estimates that are too low.

In addition to effective price, the waiting time involved with using health care services—

referred to as the time price—may further increases consumers’ opportunity cost for care.

However, there is little empirical evidence about the magnitude of the elasticity of demand with

respect to time-price. One study using data from Netherlands estimated time price elasticities in

the range of –0.09 to –0.14, measuring the value of time as the individual’s wage, controlling for

employment status (Janssen 1992). Failure to observe time price may further bias estimates of

price elasticity downward, and it probably also reduces the efficiency (and, therefore, the

apparent statistical significance) of price elasticity estimates.

Provider-Induced Demand. Finally, the role of providers may complicate the estimation

of price elasticity. Providers not only supply health services, but they also act as agents of the

patient. As suppliers, providers may respond to changes in demand triggered by a change in cost


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