Patient Cost-Sharing and Hospitalization Offsets in the Elderly

In the Medicare program, increases in cost sharing by a supplemental insurer can exert financial externalities. We study a policy change that raised patient cost sharing for the supplemental insurer for retired public employees in California. We find that physician visits and prescription drug usage have elasticities that are similar to those of the RAND Health Insurance Experiment (HIE). Unlike the HIE, however, we find substantial offset effects in terms of increased hospital utilization. The savings from increased cost sharing accrue mostly to the supplemental insurer, while the costs of increased hospitalization accrue mostly to Medicare.