In: Handbook of Health Economics
AbstractThis paper discusses theoretical and empirical findings concerning insurance reimbursement of patients or providers by insurers operating in private markets or in mixed public and private systems. Most insurances other than health insurance do not "reimburse"; instead they pay cash to insureds conditional on the occurrence of a prespecified event. In contrast, health insurance ties the payment to medical expenditures or costs incurred in some fashion, often making payments directly to medical providers. These differences are caused by a much higher degree of moral hazard and the dominant effect of insurer demand on provider prices. Health insurances also often prohibit "balance billing," provider charges in excess of some prespecified amount. Such prohibitions are related to patient inability to shop or bargain, and to insurer market power.Empirical evidence suggests that some versions of physician and hospital reimbursement have increased the level of medical spending relative to the level that would be experienced under prospective payment. In particular, cost-based reimbursement raises total spending. Optimal reimbursement, with balance billing prohibited, may also be chosen to control moral hazard; payment will generally involve a mix of fee-for-service and predetermined (salary or capitation) payment, and may well involve positive patient cost sharing. Monopsony behavior by dominant insurers is possible, and may improve consumer welfare but not total welfare.
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