Co-payment systems in health care: between moral hazard and risk reduction

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Co-payment systems in health care: between moral hazard and risk reduction

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Ed Westerhout ()
Kees Folmer ()

Abstract

It is well-known that co-payments in health insurance may increase social welfare by reducing moral hazard. Considerably less is known about the form co-payment schemes should ideally take. This paper investigates what co-payment rate and co-payment maximum characterize the optimal scheme, i.e. the scheme that achieves the highest level of social welfare, within the class of two-part co-payment schemes of which the second part features a zero rate. It also quantifies the welfare losses that correspond with sub-optimal co-payment schemes. The paper uses a model with optimizing households that are risk-averse, exercise priceelastic demand and are aware of the kinks in their budget constraints. Numerical simulations with this model indicate that the optimal scheme combines a 80% rate with a maximum of about 600 euro. Sensitivity analysis shows that the maximum varies a lot with changes in basic parameters; the 80% value for the optimal co-payment rate is quite robust, though. The welfare losses that correspond to alternative co-payment schemes are generally quite small.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Papers with number 78.

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Date of creation: Feb 2007
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Handle: RePEc:cpb:discus:78

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Find related papers by JEL classification:
D60 - Microeconomics - - Welfare Economics - - - General
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-04-09 (All new papers)
NEP-HEA-2007-04-09 (Health Economics)
NEP-IAS-2007-04-09 (Insurance Economics)

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Other versions:
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