A zero-price effect has attracted a lot of attention in behavioral economics. To date, however, no studies have credibly shown the zero-price effect using field data. This is mainly because of the difficulty in collecting data on multiple price changes near zero. Our team solved this problem by taking advantage of the variation in healthcare prices for children 7-14 years old, set by different municipalities across Japan from zero to 30% coinsurance. Our novel dataset merges these municipality-level pricing data with patient-level, item-by-item, monthly healthcare spending data from 2005 to 2015. As a result, the effects of cost sharing, including a zero price, on demand could be examined in a difference-in-differences (DID) framework to test the hypothesis that zero is a special price that discontinuously boosts demand.
Our results indicated that a zero-price effect does exist, and it discontinuously boosts demand. We estimated that adding an infinitesimally small copayment reduced overall cases of one or more visits per month by 4.8%. This discontinuous effect is significant, being around half the reduction associated with 10% coinsurance. The result indicates the potential use of the zero-price effect to boost demand for high-value, cost-effective care such as childhood immunization. On the other hand, imposing a small copayment rather than making it for free would be desirable for low-value services.
Importantly, when examining the effect of introducing a small copayment of 2 USD, we found overall demand was reduced by 29.7% for healthy children who frequently visit physicians. On the other hand, a small copayment did not deter sicker children requiring treatment from visiting at least once per month. This result implies that a small copayment is an effective screening device where moral hazard may be an issue and helps allocate resources to those in need.
In addition, the behavioral hazard problem, the consumer’s misperception of the benefit and cost of a service, was investigated by examining specific high- and low-value treatment cases. Compared to a zero price, a copayment of USD 2 decreased visits for high-value preventative care including depression, ADHD, tobacco use, and obesity by 10%. Here, the merit of a zero price to boost demand for high-value care was seen. Meanwhile, low-value care such as inappropriate use of antibiotics in cases such as bronchitis and asthma decreased by as much as 18.3%. These results indicate that small co-payments significantly reduce demand for both high- and low-value medical care, and patients do not necessarily have an accurate understanding of the value of medical care. Therefore, it is important to carefully choose between zero and non-zero prices according to policy goals, such as setting the price to zero for high-value medical care and avoiding zero prices, and opting for small co-payments in the case of low-value medical care.