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Moral hazard in insurance, value-based cost sharing, and the benefits of blissful ignorance

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  • Pauly, Mark V.
  • Blavin, Fredric E.
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    Abstract

    The conventional theory of optimal coinsurance rates for health insurance with moral hazard indicates that coinsurance should vary with the price responsiveness or price-elasticity of demand for different medical services. An alternative theory called "value-based cost sharing" indicates that coinsurance should be lower for services with higher (marginal) benefits relative to costs. This paper reconciles the two views. It shows that, if patient demands are based on correct information, optimal coinsurance is the same under either theory. If patient demands differ from informed demands, optimal coinsurance depends both on information imperfection and price responsiveness. Value-based cost sharing can be superior to providing information (even if the cost of information is minimal) when patient demands fall short of informed demands. An extended numerical example illustrates these points.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Health Economics.

    Volume (Year): 27 (2008)
    Issue (Month): 6 (December)
    Pages: 1407-1417

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    Handle: RePEc:eee:jhecon:v:27:y:2008:i:6:p:1407-1417

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    Web page: http://www.elsevier.com/locate/inca/505560

    Related research

    Keywords: Health insurance Moral hazard Value-based cost sharing;

    References

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    1. Newhouse, Joseph P., 2006. "Reconsidering the moral hazard-risk avoidance tradeoff," Journal of Health Economics, Elsevier, vol. 25(5), pages 1005-1014, September.
    2. Zeckhauser, Richard, 1970. "Medical insurance: A case study of the tradeoff between risk spreading and appropriate incentives," Journal of Economic Theory, Elsevier, vol. 2(1), pages 10-26, March.
    3. Jack, William & Sheiner, Louise, 1997. "Welfare-Improving Health Expenditure Subsidies," American Economic Review, American Economic Association, vol. 87(1), pages 206-21, March.
    4. Pauly, Mark V. & Held, Philip J, 1990. "Benign moral hazard and the cost-effectiveness analysis of insurance coverage," Journal of Health Economics, Elsevier, vol. 9(4), pages 447-461, December.
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    Cited by:
    1. Amitabh Chandra & Jonathan Skinner, 2012. "Technology Growth and Expenditure Growth in Health Care," Journal of Economic Literature, American Economic Association, vol. 50(3), pages 645-80, September.
    2. Nicolas Ziebarth, 2014. "Assessing the effectiveness of health care cost containment measures: evidence from the market for rehabilitation care," International Journal of Health Care Finance and Economics, Springer, vol. 14(1), pages 41-67, March.
    3. Glazer, Jacob & McGuire, Thomas G., 2013. "Making Medicare advantage a middle-class program," Journal of Health Economics, Elsevier, vol. 32(2), pages 463-473.
    4. Rosalba Rombaldoni, 2012. "The use of cost-sharing to control demand and the implications for equity: some theoretical and empirical evidence for Italy," Working Papers 1211, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2012.
    5. Basu, Anirban & Jena, Anupam B. & Philipson, Tomas J., 2011. "The impact of comparative effectiveness research on health and health care spending," Journal of Health Economics, Elsevier, vol. 30(4), pages 695-706, July.
    6. Anirban Basu, 2011. "Economics of Individualization in Comparative Effectiveness Research and a Basis for a Patient-Centered Health Care," NBER Working Papers 16900, National Bureau of Economic Research, Inc.
    7. Michael Drummond & Adrian Towse, 2012. "Is it time to reconsider the role of patient co-payments for pharmaceuticals in Europe?," The European Journal of Health Economics, Springer, vol. 13(1), pages 1-5, February.
    8. Jacques Drèze & Erik Schokkaert, 2013. "Arrow’s theorem of the deductible: Moral hazard and stop-loss in health insurance," Journal of Risk and Uncertainty, Springer, vol. 47(2), pages 147-163, October.
    9. Aurora García-Gallego & Nikolaos Georgantzis & Gianandrea Staffiero & Tarek Jaber-López, 2013. "An experimental study on the effects of co-payment in public services," Working Papers 2013/03, Economics Department, Universitat Jaume I, Castellón (Spain).
    10. Paula González & Nicolás Porteiro, 2009. "New perspectives in the design of pharmaceutical copayments," Economic Working Papers at Centro de Estudios Andaluces E2009/07, Centro de Estudios Andaluces.
    11. Vincenzo Rebba & Dino Rizzi, 2011. "Waiting Times and Cost Sharing for a Public Health Care Service with a Private Alternative: A Multi-agent Approach," Working Papers 2011_18, Department of Economics, University of Venice "Ca' Foscari".
    12. Katherine Baicker & Amitabh Chandra, 2011. "Aspirin, angioplasty and proton beam therapy: the economics of smarter health-care spending," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 197-235.
    13. Glazer, Jacob & McGuire, Thomas G., 2012. "A welfare measure of “offset effects” in health insurance," Journal of Public Economics, Elsevier, vol. 96(5), pages 520-523.

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