Arrow’s theorem of the deductible: moral hazard and stop-loss in health insurance
AbstractWe show that the logic of Arrow's theorem of the deductible, i.e. that it is optimal to focus insurance coverage on the states with largest expenditures, remains at work in a model with ex post moral hazard. The optimal insurance contract takes the form of a system of "implicit deductibles", i.e. it results in the same indemnities as a contract with full insurance above a variable deductible positively related to the elasticity of medical expenditures with respect to the insurance rate. In a model with an explicit stop-loss arrangement, i.e. with a predefined ceiling on the annual expenses of the insured, this stop-loss takes the form of a deductible, i.e. there is no reimbursement for expenses below the stop-loss amount. One motivation to have some insurance below the deductible arises if regular health care expenditures in a situation of standard health have a negative effect on the probability of getting into a state with large medical expenses.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2012027.
Date of creation: 25 Jul 2012
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optimal health insurance; deductible stop-loss; moral hazard;
Other versions of this item:
- 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.
- I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
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