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A welfare measure of “offset effects” in health insurance


  • Glazer, Jacob
  • McGuire, Thomas G.


Changing health insurance coverage for one service may affect use of other insured services. When improving coverage for one service reduces use of another, the savings are referred to as “offset effects.” For example, costs of better coverage for prescription drugs may be partly “offset” by reductions in hospital costs. Offset effects have welfare implications but it has not been clear how to value these impacts in design of health insurance. We show that plan-paid – rather than total – spending is the right welfare measure of the offset effect, and go on to develop a “sufficient statistic” for evaluating the welfare effects of change in coverage in the presence of multiple goods. We derive a simple rule for when a coverage improvement increases welfare due to offset effects.

Suggested Citation

  • Glazer, Jacob & McGuire, Thomas G., 2012. "A welfare measure of “offset effects” in health insurance," Journal of Public Economics, Elsevier, vol. 96(5), pages 520-523.
  • Handle: RePEc:eee:pubeco:v:96:y:2012:i:5:p:520-523 DOI: 10.1016/j.jpubeco.2012.02.007

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    References listed on IDEAS

    1. Newhouse, Joseph P., 2006. "Reconsidering the moral hazard-risk avoidance tradeoff," Journal of Health Economics, Elsevier, vol. 25(5), pages 1005-1014, September.
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    3. Tomas J. Philipson & Dana Goldman, 2007. "Integrated Insurance Design in the Presence of Multiple Medical Technologies," American Economic Review, American Economic Association, vol. 97(2), pages 427-432, May.
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    5. Pauly, Mark V. & Blavin, Fredric E., 2008. "Moral hazard in insurance, value-based cost sharing, and the benefits of blissful ignorance," Journal of Health Economics, Elsevier, vol. 27(6), pages 1407-1417, December.
    6. Baoping Shang & Dana P. Goldman, 2007. "Prescription Drug Coverage and Elderly Medicare Spending," NBER Working Papers 13358, National Bureau of Economic Research, Inc.
    7. Gaynor Martin & Li Jian & Vogt William B, 2007. "Substitution, Spending Offsets, and Prescription Drug Benefit Design," Forum for Health Economics & Policy, De Gruyter, vol. 10(2), pages 1-33, July.
    8. Lakdawalla, Darius & Sood, Neeraj, 2009. "Innovation and the welfare effects of public drug insurance," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 541-548, April.
    9. Raj Chetty, 2009. "Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 451-488, May.
    10. Amitabh Chandra & Jonathan Gruber & Robin McKnight, 2010. "Patient Cost-Sharing and Hospitalization Offsets in the Elderly," American Economic Review, American Economic Association, vol. 100(1), pages 193-213, March.
    11. Frank R. Lichtenberg, 2007. "The Impact of New Drugs on US Longevity and Medical Expenditure, 1990–2003: Evidence from Longitudinal, Disease-Level Data," American Economic Review, American Economic Association, vol. 97(2), pages 438-443, May.
    12. 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.
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    Cited by:

    1. Rapp, Thomas & Chauvin, Pauline & Sirven, Nicolas, 2015. "Are public subsidies effective to reduce emergency care? Evidence from the PLASA study," Social Science & Medicine, Elsevier, vol. 138(C), pages 31-37.

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    Health insurance design; Offset effects;


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