Cost-sharing or rebate: The impact of health insurance design on reducing inefficient care

This paper investigates how the design of health insurance plans influences individuals' treatment decisions. We derive several hypotheses how the framing of incentives in a plan affects behavior and test these hypotheses in a laboratory experiment. Our results show that rebates are more effective in containing costs, as individuals request significantly less inefficient low-value care under rebates than under cost-sharing. We elicit individuals' degree of loss aversion but find no evidence that loss aversion influences utilization rates. Instead, our results suggest that relative thinking and the difficulty of understanding the dynamic incentive structure drive the design effect.