IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this book chapter

The anatomy of health insurance

In: Handbook of Health Economics

  • Cutler, David M.
  • Zeckhauser, Richard J.

This article describes the anatomy of health insurance. It begins by considering the optimal design of health insurance policies. Such policies must make tradeoffs appropriately between risk sharing on the one hand and agency problems such as moral hazard (the incentive of people to seek more care when they are insured) and supplier-induced demand (the incentive of physicians to provide more care when they are well reimbursed) on the other. Optimal coinsurance arrangements make patients pay for care up to the point where the marginal gains from less risk sharing are just offset by the marginal benefits from reduced provision of low valued care. Empirical evidence shows that both moral hazard and demand-inducement are quantitatively important. Coinsurance based on expenditure is a crude control mechanism. Moreover, it places no direct incentives on physicians, who are responsible for most expenditure decisions. To place such incentives on physicians is the goal of supply-side cost containment measures, such as utilization review and capitation. This goal motivates the surge in managed care in the United States, which unites the functions of insurance and provision, and allows for active management of the care that is delivered.The analysis then turns to the operation of health insurance markets. Economists generally favor choice in health insurance for the same reasons they favor choice in other markets: choice allows people to opt for the plan that is best for them and encourages plans to provide services efficiently. But choice in health insurance is a mixed blessing because of adverse selection -- the tendency of the sick to choose more generous insurance than the healthy. When sick and healthy enroll in different plans, plans disproportionately composed of poor risks have to charge more than they would if they insured an average mix of people. The resulting high premiums create two adverse effects: they discourage those who are healthier but would prefer generous care from enrolling in those plans (because the premiums are so high), and they encourage plans to adopt measures that deter the sick from enrolling (to reduce their overall costs). The welfare losses from adverse selection are large in practice. Added to them are further losses from premiums that vary with observable health status. Because insurance is contracted for annually, people are denied a valuable form of intertemporal insurance -- the right to buy health coverage at average rates in the future should they get sick today. As the ability to predict future health status increases, the lack of intertemporal insurance will become more problematic.The article concludes by relating health insurance to the central goal of medical care expenditures -- better health. Studies to date are not clear on which approaches to health insurance promote health in the most cost-efficient manner. Resolving this question is the central policy concern in health economics.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/B7P5R-4FF8276-H/2/2d88f2cde4520ec59409e5d8a98135f2
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

as
in new window

This chapter was published in:
  • A. J. Culyer & J. P. Newhouse (ed.), 2000. "Handbook of Health Economics," Handbook of Health Economics, Elsevier, edition 1, volume 1, number 1, October.
  • This item is provided by Elsevier in its series Handbook of Health Economics with number v:1:1-11.
    Handle: RePEc:eee:heachp:v:1:1-11
    Contact details of provider: Web page: http://www.elsevier.com/wps/find/bookseriesdescription.cws_home/BS_HE/description

    References listed on IDEAS
    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.:

    as in new window
    1. Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-73, June.
    2. de Meza, David, 1983. "Health insurance and the demand for medical care," Journal of Health Economics, Elsevier, vol. 2(1), pages 47-54, March.
    3. Goldman, Fred & Grossman, Michael, 1978. "The Demand for Pediatric Care: An Hedonic Approach," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 259-80, April.
    4. Manning, Willard G. & Marquis, M. Susan, 1996. "Health insurance: The tradeoff between risk pooling and moral hazard," Journal of Health Economics, Elsevier, vol. 15(5), pages 609-639, October.
    5. McAvinchey, Ian D. & Yannopoulos, Andreas, 1993. "Elasticity estimates from a dynamic model of interrelated demands for private and public acute health care," Journal of Health Economics, Elsevier, vol. 12(2), pages 171-186, July.
    6. Laurence C. Baker & Kenneth S. Corts, 1995. "The Effects of HMOs on Conventional Insurance Premiums: Theory and Evidence," NBER Working Papers 5356, National Bureau of Economic Research, Inc.
    7. Feldman, Roger & Dowd, Bryan, 1991. "Must adverse selection cause premium spirals?," Journal of Health Economics, Elsevier, vol. 10(3), pages 349-357, October.
    8. Marquis, M Susan & Phelps, Charles E, 1987. "Price Elasticity and Adverse Selection in the Demand for Supplementary Health Insurance," Economic Inquiry, Western Economic Association International, vol. 25(2), pages 299-313, April.
    9. Victor R. Fuchs & Marcia J. Kramer, 1972. "Determinants of Expenditures for Physicians' Services in the United States 1948–68," NBER Books, National Bureau of Economic Research, Inc, number fuch72-3, September.
    10. Victor R. Fuchs & Marcia J. Kramer, 1972. "Appendices to "Determinants Of Expenditures For Physicians' Services In The United States 1948-68"," NBER Chapters, in: Determinants of Expenditures for Physicians' Services in the United States 1948–68, pages 43-60 National Bureau of Economic Research, Inc.
    11. David A. Wise, 1998. "Inquiries in the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise98-2, September.
    12. James R. Baumgardner, 1991. "The Interaction between Forms of Insurance Contract and Types of Technical Change in Medical Care," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 36-53, Spring.
    13. Hodgkin, Dominic & McGuire, Thomas G., 1994. "Payment levels and hospital response to prospective payment," Journal of Health Economics, Elsevier, vol. 13(1), pages 1-29, March.
    14. Blomqvist, Ake, 1997. "Optimal non-linear health insurance," Journal of Health Economics, Elsevier, vol. 16(3), pages 303-321, June.
    15. Ellis, Randall P. & McGuire, Thomas G., 1996. "Hospital response to prospective payment: Moral hazard, selection, and practice-style effects," Journal of Health Economics, Elsevier, vol. 15(3), pages 257-277, June.
    16. Buchmueller, Thomas C. & Feldstein, Paul J., 1997. "The effect of price on switching among health plans," Journal of Health Economics, Elsevier, vol. 16(2), pages 231-247, April.
    17. Victor R. Fuchs & Marcia J. Kramer, 1972. "Introduction to "Determinants Of Expenditures For Physicians' Services In The United States 1948-68"," NBER Chapters, in: Determinants of Expenditures for Physicians' Services in the United States 1948–68, pages 1-4 National Bureau of Economic Research, Inc.
    18. Feldstein, Martin S, 1970. "The Rising Price of Physicians' Services," The Review of Economics and Statistics, MIT Press, vol. 52(2), pages 121-33, May.
    19. Joan L. Buchanan & Emmett B. Keeler & John E. Rolph & Martin R. Holmer, 1991. "Simulating Health Expenditures Under Alternative Insurance Plans," Management Science, INFORMS, vol. 37(9), pages 1067-1090, September.
    20. Altman, Daniel & Cutler, David M & Zeckhauser, Richard J, 1998. "Adverse Selection and Adverse Retention," American Economic Review, American Economic Association, vol. 88(2), pages 122-26, May.
    21. Pauly, Mark V & Kunreuther, Howard & Hirth, Richard, 1995. "Guaranteed Renewability in Insurance," Journal of Risk and Uncertainty, Springer, vol. 10(2), pages 143-56, March.
    22. Charles Wilson, 1980. "The Nature of Equilibrium in Markets with Adverse Selection," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 108-130, Spring.
    23. Feldstein, Martin & Friedman, Bernard, 1977. "Tax subsidies, the rational demand for insurance and the health care crisis," Journal of Public Economics, Elsevier, vol. 7(2), pages 155-178, April.
    24. Marquis, M. Susan, 1992. "Adverse selection with a multiple choice among health insurance plans: A simulation analysis," Journal of Health Economics, Elsevier, vol. 11(2), pages 129-151, August.
    25. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
    26. Davis, Karen & Russell, Louise B, 1972. "The Substitution of Hospital Outpatient Care for Inpatient Care," The Review of Economics and Statistics, MIT Press, vol. 54(2), pages 109-20, May.
    27. Rosett, Richard N & Huang, Lien-fu, 1973. "The Effect of Health Insurance on the Demand for Medical Care," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 281-305, Part I, M.
    28. Ching-to Albert Ma & Thomas G. McGuire, 1995. "Optimal Health Insurance and Provider Payment," Papers 0059, Boston University - Industry Studies Programme.
    29. David M. Cutler & Sarah J. Reber, 1998. "Paying for Health Insurance: The Trade-Off between Competition and Adverse Selection," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 433-466.
    30. Wholey, Douglas & Feldman, Roger & Christianson, Jon B., 1995. "The effect of market structure on HMO premiums," Journal of Health Economics, Elsevier, vol. 14(1), pages 81-105, May.
    31. Roger Feldman & Michael Finch & Bryan Dowd & Steven Cassou, 1989. "The Demand for Employment-Based Health Insurance Plans," Journal of Human Resources, University of Wisconsin Press, vol. 24(1), pages 115-142.
    32. Richard G. Frank & Judith R. Lave, 1986. "The Effect of Benefit Design on the Length of Stay of Medicaid Psychiatric Patients," Journal of Human Resources, University of Wisconsin Press, vol. 21(3), pages 321-337.
    33. Mark V. Pauly, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 44-62.
    34. Nichols, Albert L & Zeckhauser, Richard J, 1982. "Targeting Transfers through Restrictions on Recipients," American Economic Review, American Economic Association, vol. 72(2), pages 372-77, May.
    35. Jayanta Bhattacharya & William B. Vogt & Aki Yoshikawa & Toshitaka Nakahara, 1996. "The Utilization of Outpatient Medical Services in Japan," Journal of Human Resources, University of Wisconsin Press, vol. 31(2), pages 450-476.
    36. Joseph P. Newhouse, 1996. "Reimbursing Health Plans and Health Providers: Efficiency in Production versus Selection," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1236-1263, September.
    37. R. G. Beck, 1974. "The Effects of Co-Payment on the Poor," Journal of Human Resources, University of Wisconsin Press, vol. 9(1), pages 129-142.
    38. Pauly, Mark V, 1986. "Taxation, Health Insurance, and Market Failure in the Medical Economy," Journal of Economic Literature, American Economic Association, vol. 24(2), pages 629-75, June.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:heachp:v:1:1-11. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.