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On the design of optimal health insurance contracts under ex post moral hazard

Author

Listed:
  • Pierre Martinon

    () (Ecole Polytechnique, Department of Applied Mathematics and INRIA)

  • Pierre Picard

    () (CREST-Ecole Polytechnique)

  • Anasuya Raj

    () (CREST-Ecole Polytechnique)

Abstract

We analyze the design of optimal medical insurance under ex post moral hazard, i.e., when illness severity cannot be observed by insurers and policyholders decide for themselves on their health expenditures. The trade-off between ex ante risk sharing and ex post incentive compatibility is analyzed in an optimal revelation mechanism under hidden information and risk aversion. The optimal contract provides partial insurance at the margin, with a deductible when insurers’ rates are affected by a positive loading, and it may also include an upper limit on coverage. The potential to audit the health state leads to an upper limit on out-of-pocket expenses.

Suggested Citation

  • Pierre Martinon & Pierre Picard & Anasuya Raj, 2018. "On the design of optimal health insurance contracts under ex post moral hazard," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(2), pages 137-185, September.
  • Handle: RePEc:kap:geneva:v:43:y:2018:i:2:d:10.1057_s10713-018-0034-y
    DOI: 10.1057/s10713-018-0034-y
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    References listed on IDEAS

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    More about this item

    Keywords

    Health insurance; Contract; Ex post moral hazard; Optimal control;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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