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Adverse Selection, Moral Hazard, and Outlier Payment Policy

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  • Michel Mougeot
  • Florence Naegelen

Abstract

In this article, we analyze the rationale for introducing outlier payments into a prospective payment system for hospitals under adverse selection and moral hazard. The payer has only two instruments: a fixed price for patients whose treatment cost is below a threshold and a cost‐sharing rule for outlier patients. We show that a fixed‐price policy is optimal when the hospital is sufficiently benevolent. When the hospital is weakly benevolent, a mixed policy solving a trade‐off between rent extraction, efficiency, and dumping deterrence must be preferred. We show how the optimal combination of fixed price and partially cost‐based payment depends on the degree of benevolence of the hospital, the social cost of public funds, and the distribution of patients severity.

Suggested Citation

  • Michel Mougeot & Florence Naegelen, 2009. "Adverse Selection, Moral Hazard, and Outlier Payment Policy," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(1), pages 177-195, March.
  • Handle: RePEc:bla:jrinsu:v:76:y:2009:i:1:p:177-195
    DOI: 10.1111/j.1539-6975.2009.01293.x
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    Cited by:

    1. Mougeot, Michel & Naegelen, Florence, 2008. "Supply-side risk adjustment and outlier payment policy," Journal of Health Economics, Elsevier, vol. 27(5), pages 1196-1200, September.
    2. Augusto Felício, J. & Rodrigues, Ricardo, 2015. "Organizational factors and customers' motivation effect on insurance companies' performance," Journal of Business Research, Elsevier, vol. 68(7), pages 1622-1629.
    3. François Maréchal & Lionel Thomas, 2021. "The impact of medical complications on optimal hospital payment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(6), pages 1144-1173, December.
    4. Cheung, Ka Chun & Phillip Yam, Sheung Chi & Yuen, Fei Lung & Zhang, Yiying, 2020. "Concave distortion risk minimizing reinsurance design under adverse selection," Insurance: Mathematics and Economics, Elsevier, vol. 91(C), pages 155-165.
    5. François Maréchal & Lionel Thomas, 2019. "The optimal payment system for hospitals under adverse selection, moral hazard, and limited liability," Working Papers 2019-04, CRESE.
    6. repec:dau:papers:123456789/5993 is not listed on IDEAS
    7. Richard Dusansky & Çağatay Koç, 2010. "Implications of the Interaction Between Insurance Choice and Medical Care Demand," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 129-144, March.
    8. Yaping Wu & Yijuan Chen & Sanxi Li, 2018. "Optimal compensation rule under provider adverse selection and moral hazard," Health Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 509-524, March.

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