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Why ‘Optimal’ Payment for Healthcare Providers Can Never be Optimal Under Community Rating

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  • Peter Zweifel

    (University of Zurich)

  • H. E. Frech

    (University of California at Santa Barbara)

Abstract

This article extends the existing literature on optimal provider payment by accounting for consumer heterogeneity in preferences for health insurance and healthcare. This heterogeneity breaks down the separation of the relationship between providers and the health insurer and the relationship between consumers and the insurer. Both experimental and market evidence for a high degree of heterogeneity are presented. Given heterogeneity, a uniform policy fails to effectively control moral hazard, while incentives for risk selection created by community rating cannot be neutralized through risk adjustment. Consumer heterogeneity spills over into relationships with providers, such that a uniform contract with providers also cannot be optimal. The decisive condition for ensuring optimality of provider payment is to replace community rating (which violates the principle of marginal cost pricing) with risk rating of contributions combined with subsidization targeted at high risks with low incomes.

Suggested Citation

  • Peter Zweifel & H. E. Frech, 2016. "Why ‘Optimal’ Payment for Healthcare Providers Can Never be Optimal Under Community Rating," Applied Health Economics and Health Policy, Springer, vol. 14(1), pages 9-20, February.
    • Handle: RePEc:spr:aphecp:v:14:y:2016:i:1:d:10.1007_s40258-015-0207-0
    DOI: 10.1007/s40258-015-0207-0
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    Cited by:

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    3. Peter Zweifel, 2016. "‘Catastrophic’ healthcare expenditure: critique of a problematic concept and a proposal," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 17(5), pages 519-520, June.
    4. Peter Zweifel, 2018. "The triple challenge of mental health," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 19(3), pages 309-313, April.

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