Value Based Cost Sharing Meets the Theory of Moral Hazard: Medical Effectiveness in Insurance Benefits Design
AbstractThe conventional theory of optimal coinsurance rates in health insurance in the presence of moral hazard indicates that, in situations of equal risk characteristics, coinsurance should vary if the price-responsiveness or price-elasticity of demand for different medical services varies, and should be larger for the more price responsive services. An alternative theory called "value-based cost sharing" indicates that coinsurance should be lower for services with higher (marginal) benefits relative to costs. This paper reconciles the two views. It shows that, if patient demands are based on correct information on benefits and costs, the conclusion of the conventional view is identical to the conclusion from the value-based approach. If patient demands differ from correct demands, it is shown that optimal coinsurance depends both on the extent and direction of information imperfection and on price-responsiveness or price elasticity. The paper also shows, as an alternative to adjusting coinsurance to deal with information imperfection, that providing better information which affects patient demands can be superior if uninformed patient demands exceed informed patient demands, but value based cost sharing can be superior to providing information (even if the cost of information is minimal) when patient demands fall short of informed demands. An extended numerical example illustrates these points.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13044.
Date of creation: Apr 2007
Date of revision:
Note: HC HE PE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-28 (All new papers)
- NEP-HEA-2007-04-28 (Health Economics)
- NEP-IAS-2007-04-28 (Insurance Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Newhouse, Joseph P., 2006. "Reconsidering the moral hazard-risk avoidance tradeoff," Journal of Health Economics, Elsevier, vol. 25(5), pages 1005-1014, September.
- Zeckhauser, Richard, 1970. "Medical insurance: A case study of the tradeoff between risk spreading and appropriate incentives," Journal of Economic Theory, Elsevier, vol. 2(1), pages 10-26, March.
- Pauly, Mark V. & Held, Philip J, 1990. "Benign moral hazard and the cost-effectiveness analysis of insurance coverage," Journal of Health Economics, Elsevier, vol. 9(4), pages 447-461, December.
- Gravelle, Hugh & Siciliani, Luigi, 2008.
"Ramsey waits: Allocating public health service resources when there is rationing by waiting,"
Journal of Health Economics,
Elsevier, vol. 27(5), pages 1143-1154, September.
- Hugh Gravelle & Luigi Siciliani, 2007. "Ramsey Waits: Allocating Public Health Service Resources when there is Rationing by Waiting," Discussion Papers 07/15, Department of Economics, University of York.
- Holst, Jens, 2010. "Patient cost sharing: Reforms without evidence. Theoretical considerations and empirical findings from industrialized countries," Discussion Papers, Research Group Public Health SP I 2010-303, Social Science Research Center Berlin (WZB).
- Jacco Thijssen, 2007. "Ramsey Waits: A Computational Study on General Equilibrium Pricing of Derivative Securities," Discussion Papers 07/16, Department of Economics, University of York.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.