Events

We document that the source of funds for paying health insurance premiums has a dramatic impact on plan choices. We focus on the MediSave program in Singapore, a medical savings account that is used to pay out-of-pocket medical spending. Residents can also pay their health insurance premiums with cash or MediSave funds, but are subject to limits that vary by age and over time. By exploiting variations in those limits, we consistently find that when individuals are able to pay their health insurance premiums with MediSave funds, they are less price sensitive and more willing to enroll in more generous plans. We develop and estimate a mental accounting model which explains these patterns. We embed and reject alternative explanations such as hassle costs and liquidity constraints. We then extend this model and show that mental accounting can explain much, but not all, of the misweighting of premiums relative to out-of-pocket expenses in health insurance choice. We also find that allowing MediSave payment for both premiums and out-of-pocket expenses (e.g. putting them in the same mental account) enhances individual welfare and reduces adverse selection.