Effects of cost sharing on the demand for physician services in Japan: Evidence from a natural experiment

In this paper, we investigate the effects of cost sharing on the demand for physician services in Japan by using a natural experiment, namely, the increase in the coinsurance rate for household heads in 1997. Our primary finding from the two-year data, which includes the transitory effects of the reform, is that the effects of the reform on the frequency of physician visits were negative and statistically significant, and that the effects of the reform on expenditures per visit were also negative. Based on these results, the arc elasticity of demand for physician services is −0.055. When we exclude the transitory period using the three-year data, the effects of the reform on the frequency of physician visits turn to be positive. It seems that the patients marginally curtailed the number of physician visits immediately after the reform; however, this effect was not sustained in the six months after the reform. We conclude that Japanese patients are not very price sensitive within the 10-20 percent range of coinsurance rate. Another important finding in our study is that the decrease in expenditure per visit retained even after the transitory period. This result suggests that the existence of a possible moral hazard in the treatment intensity although the decision-making process on the treatment intensity needs to be examined more carefully.