OBJECTIVES: The Urban and Rural Resident Basic Medical Insurance (URRBMI) aims to promote balanced urban-rural medical development, reduce medical resource disparities, and enhance coverage to alleviate medical costs. Despite implementation, rising per capita medical costs pose a challenge, possibly from policy-induced moral hazards.

METHODS: This study utilized CHARLS data from 2013, 2015, and 2018, involving 40,816 individuals. Employing Fixed Effects DID methods, we assess its effects on resource use and medical costs for urban and rural residents. It also explains the sources of rising medical costs in terms of both demand release and moral hazard.The PSM-DID approach addresses endogeneity and further tests the existence of ex-post moral hazard. We also explore the ex-ante moral hazard effects of integration reforms.

RESULTS: The empirical results show that (1) the URRBMI integration has raised medical costs but has also released latent medical demand. (2) The sources of increase in medical costs are medical demand release and ex-post moral hazard. For the low- and middle-income group, the URRBMI integration mainly triggers the increase of medical costs through demand release. For insured individuals in the high-income group, the URRBMI integration increases medical costs mainly through the ex-post moral hazard problem. (3) During the integration, a moral hazard phenomenon directs residents to major medical institutions. (4) Nevertheless, the integration has positively impacted residents' preventive behaviors, potentially decreasing long-term costs.

CONCLUSIONS: Addressing the issue of moral hazard in the process of URRBMI integration is of paramount importance and requires measures such as the development of cost-sharing mechanisms and the reduction of moral hazard. This study contributes to the development of healthcare policies in China and other developing countries to mitigate the growing medical burden.