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VII. METHODOLOGICAL CHALLENGES

Estimating the elasticity of demand for health insurance and health care is not a simple task.

Given the variety of factors involved in consumers’ decision-making process and the complexity

of the health care market, isolating the change in demand that can be attributed only to a change

in price or income is exceedingly difficult. This chapter highlights four common methodological

challenges in estimating the price or income elasticity of demand for health insurance or health

care services: unobserved price, endogeneity, omitted variables, and provider-induced demand.

We describe the impact of each problem on estimates of price elasticity and summarize the

approaches that researchers have taken to address them.

A. UNOBSERVED PRICE

Studies that examine the own-price elasticity of demand must consider not only the price of

insurance or care that is purchased, but also the price when it is not purchased. However,

surveys typically do not ask respondents (employers or employees) about the price they were

offered, if they ultimately did not buy coverage or care. For the purpose of estimating price

elasticity, the problem with such data is that observed prices are not random. For example, firms

that offer coverage to their employees may systematically have been offered lower premiums. If

so, data from firms that offer coverage cannot be used to accurately predict premiums for firms

that do not.

A simple approach to address this problem, often used in early studies, is to include in the

model both types of firms (with observed and unobserved prices) and estimate a Tobit model that

adjusts for the left-censored observations. However, the key assumption of a Tobit model is that

the same factors affect both the decision to offer coverage and the price of that coverage. Some

researchers have challenged this assumption and advocate use of a sequential decision model

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