The Samaritan’s Dilemma and public health insurance

When the government cannot commit to withdraw from providing charity health care, as is the case when it faces the Samaritan's Dilemma, a pub- lic health insurance scheme can be Pareto improving. However, the large heterogeneity in the design of such schemes observed around the world begs the question of what characterizes the optimal public health insurance plan. In this paper, we examine the distortions created by three plans, nested in terms of the constraints they place on the individual's decision problem. We ¯nd that linking public health insurance bene¯ts to the use of a certain type of health care, such as treatment in public hospitals, creates incentives against the e±cient use of higher quality health care. When such constraint is lifted, but the public insurance scheme still determines a minimum level of coverage for each illness, ¯rst best e±ciency is achieved. It turns out that placing constraints in the form of minimum levels of coverage for each illness is necessary for e±ciency. Removing such constraint decreases the relative price of high quality care for a subset of illnesses, and leads to too much high quality care used in equilibrium. This analysis suggests that the widespread practice of determining illness by illness coverage in public health insurance systems has an e±ciency rationale, despite the administrative and informational di±culties that it entails.