Habit Formation in the Consumption of Health Care Services in Rural and Urban America

Does habit exist in health care consumption? How strong is it? Is there any rural-urban disparity?
The answers to these questions shed light on whether and to what extent we can rely on the
independence axiom in the derivation of the classic discounted utility framework and modeling
health demand. We exploit a bounding approach in conjunction with the Arellano-Bond point
estimation and provide the first estimates of habit formation in the consumption of health care
services. We use a long panel data from the Health and Retirement Study to mitigate the Nickell’s
bias. By implementing a two-part model, we also account for the psychological distinguishment
between habit-initiated and habit-performed behaviors. We find persistent habits in the
consumption of prescription drugs and dental care among the elderly, while no evidence of habitual
consumption of hospital care, office-based medical visits or outpatient surgeries. Results from the
two-part model show that health care consumption is mostly a habit-initiated behavior that requires
less cognitive input when initiating health care use through an initial visit. Differences of the found
habitual consumption are insignificant between rural and urban America.