Integrated Insurance Design in the Presence of Multiple Medical Technologies
The classic theory of moral hazard concerns the insurance of a single good and predicts that co-insurance is larger when the elasticity of demand is higher and when small risks are insured. We extend this analysis to the insurance of multiple goods; for example, the simultaneous insurance of medical services and prescription drugs. We show that when multiple goods are either complements or substitutes--so that a change in co-insurance for one service affects the demand of others--the classic moral hazard results do not hold. For example, the single good model would predict high co-payments for prescription drugs since drug demand is elastic and of modest financial risk. However, a model of multi-good insurance suggests such drug coverage may optimally involve zero or even negative co-insurance when it is a substitute to other services insured such as hospital care or physician services. We summarize some of the empirical evidence in support of markets adopting optimal integrated pricing structures rather than individually optimal pricing structures.
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Volume (Year): 97 (2007)
Issue (Month): 2 (May)
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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.:
- Martin Gaynor & Jian Li & William B. Vogt, 2006.
"Is Drug Coverage a Free Lunch? Cross-Price Elasticities and the Design of Prescription Drug Benefits,"
The Centre for Market and Public Organisation
07/166, Department of Economics, University of Bristol, UK.
- Martin Gaynor & Jian Li & William B. Vogt, 2006. "Is Drug Coverage a Free Lunch? Cross-Price Elasticities and the Design of Prescription Drug Benefits," NBER Working Papers 12758, National Bureau of Economic Research, Inc.
- Lichtenberg, Frank R, 1996. "Do (More and Better) Drugs Keep People Out of Hospitals?," American Economic Review, American Economic Association, vol. 86(2), pages 384-388, May.
- 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.
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