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Getting better, feeling worse : cure rates, health insurance, and welfare

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  • Robert F. Graboyes
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    Abstract

    We model a health insurance market where rising cure rates for a disease may paradoxically diminish welfare and even negate the desirability of health insurance altogether. In the model, rising cure rates can affect welfare in two ways: (1) directly, by improving some individuals' health, and (2) indirectly, by influencing the mode and parameters of the optimal insurance contract and, thus, ex post financial wealth distribution. (“Mode” refers to the qualitative specifications of the contract—presence or absence of indemnities and full, partial or zero coverage of treatments received. “Parameters” refers to the quantitative features of the contracts—level of nonzero indemnities, deductibles and premiums.) ; Graboyes (2000a) compares the relative efficiency of deductibles and indemnities in deterring low-benefit patients (those whom treatment is less likely to cure) from seeking expensive medical care. The current paper asks how optimal insurance and associated welfare change as curative technology improves. Deterring some but not all patients requires deductibles or indemnities because one’s H/L status is known to all, but not legally verifiable. ; We find that advances in curative power may reduce welfare and even eradicate health insurance. This is because at higher cure rates, higher indemnities and deductibles are needed to deter patients from seeking treatment. Given certain population parameters, higher cure rates can only reduce welfare. The findings raise some practical, empirical, and ethical questions; some of these issues are enumerated in the conclusion.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 00-05.

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    Date of creation: 2000
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    Handle: RePEc:fip:fedrwp:00-05

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    Related research

    Keywords: Insurance; Health ; Medical care; Cost of;

    References

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    1. Akerlof, George A, 1983. "Loyalty Filters," American Economic Review, American Economic Association, vol. 73(1), pages 54-63, March.
    2. James R. Baumgardner, 1991. "The Interaction between Forms of Insurance Contract and Types of Technical Change in Medical Care," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 36-53, Spring.
    3. David M. Cutler & Louise Sheiner, 1998. "Managed Care and the Growth of Medical Expenditures," NBER Chapters, in: Frontiers in Health Policy Research, volume 1, pages 77-116 National Bureau of Economic Research, Inc.
    4. Gianfrancesco, Frank D., 1983. "A proposal for improving the efficiency of medical insurance," Journal of Health Economics, Elsevier, vol. 2(2), pages 175-184, August.
    5. Feldstein, Martin S, 1973. "The Welfare Loss of Excess Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 251-80, Part I, M.
    6. Randall P. Ellis & Thomas G. McGuire, 1993. "Supply-Side and Demand-Side Cost Sharing in Health Care," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 135-151, Fall.
    7. David M. Cutler, 1996. "Public Policy for Health Care," NBER Working Papers 5591, National Bureau of Economic Research, Inc.
    8. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
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