This article describes the anatomy of health insurance. It begins by considering the optimal design of health insurance policies. Such policies must make tradeoffs appropriately between risk sharing on the one hand and agency problems such as moral hazard (the incentive of people to seek more care when they are insured) and supplier-induced demand (the incentive of physicians to provide more care when they are well reimbursed) on the other. Optimal coinsurance arrangements make patients pay for care up to the point where the marginal gains from less risk sharing are just offset by the marginal benefits from less wasteful care being provided. Empirical evidence shows that both moral hazard and demand-inducement are quantitatively important. Coinsurance based on expenditure is a crude control mechanism. Moreover, it places no direct incentives on physicians, who are responsible for most expenditure decisions. To place such incentives on physicians is the goal of supply-side cost containment measures, such as utilization review and capitation. This goal motivates the surge in managed care in the United States, which unites the functions of insurance and provision, and allows for active management of the care that is delivered. The analysis then turns to the operation of health insurance markets. Economists generally favor choice in health insurance for the same reasons they favor choice in other markets: choice allows people to opt for the plan that is best for them and encourages plans to provide services efficiently. But choice in health insurance is a mixed blessing because of adverse selection -- the tendency for the sick to choose more generous insurance than the healthy. When sick and healthy enroll in different plans, plans disproportionately composed of poor risks have to charge more than they would if they insured an average mix of people. The resulting high premiums create two adverse effects: they discourage those who are healthier but would prefer generous care from enrolling in those plans (because the premiums are so high), and they encourage plans to adopt measures that deter the sick from enrolling (to reduce their overall costs). The welfare losses from adverse selection are large in practice. Added to them are further losses from having premiums vary with observable health status. Because insurance is contracted for annually, people are denied a valuable form of intertemporal insurance -- the right to buy health coverage at average rates in the future should they get sick today. As the ability to predict future health status increases, the lack of intertemporal insurance will become more problematic. The article concludes by relating health insurance to the central goal of medical care expenditures - better health. Studies to date are not clear on which approaches to health insurance promote health in the most cost-efficient manner. Resolving this question is the central policy concern in health economics.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
7176.
Length: Date of creation: Jun 1999 Date of revision: Handle: RePEc:nbr:nberwo:7176
Note: AG PE HC Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A. Phone: 617-868-3900 Email: Web page: http://www.nber.org More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: ().
Related research
Keywords:
Other versions of this item:
Chapter
Cutler, David M. & Zeckhauser, Richard J., 2000.
"The anatomy of health insurance,"
Handbook of Health Economics,
in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 11, pages 563-643
Elsevier.
[Downloadable!] (restricted)
Find related papers by JEL classification: I1 - Health, Education, and Welfare - - Health
This paper has been announced in the following NEP Reports:
Cited by: (explanations, 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.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.