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

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  • Ed Westerhout

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  • Kees Folmer

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    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 price-elastic 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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    Bibliographic Info

    Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper 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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    1. Manning, Willard G. & Marquis, M. Susan, 1996. "Health insurance: The tradeoff between risk pooling and moral hazard," Journal of Health Economics, Elsevier, Elsevier, vol. 15(5), pages 609-639, October.
    2. Zweifel, Peter & Manning, Willard G., 2000. "Moral hazard and consumer incentives in health care," Handbook of Health Economics, Elsevier, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 8, pages 409-459 Elsevier.
    3. Sandmo, Agnar, 1987. "A Reinterpretation of Elasticity Formulae in Optimum Tax Theory," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 54(213), pages 89-96, February.
    4. Rosett, Richard N & Huang, Lien-fu, 1973. "The Effect of Health Insurance on the Demand for Medical Care," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(2), pages 281-305, Part I, M.
    5. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
    6. Blomqvist, Ake, 1997. "Optimal non-linear health insurance," Journal of Health Economics, Elsevier, Elsevier, vol. 16(3), pages 303-321, June.
    7. Wedig, Gerard J., 1988. "Health status and the demand for health : Results on price elasticities," Journal of Health Economics, Elsevier, Elsevier, vol. 7(2), pages 151-163, June.
    8. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, American Economic Association, vol. 69(1), pages 84-96, March.
    9. Daniel Feenberg & Jonathan Skinner, 1992. "The Risk and Duration of Catastrophic Health Care Expenditures," NBER Working Papers 4147, National Bureau of Economic Research, Inc.
    10. Feldman, Roger & Dowd, Bryan, 1991. "A New Estimate of the Welfare Loss of Excess Health Insurance," American Economic Review, American Economic Association, American Economic Association, vol. 81(1), pages 297-301, March.
    11. Feldstein, Martin S, 1973. "The Welfare Loss of Excess Health Insurance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(2), pages 251-80, Part I, M.
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