Arrow's theorem of the deductible: moral hazard and stop-loss in health insurance

The logic of Arrow’s theorem of the deductible, i.e. that it is optimal to focus insurance coverage on the states with largest expenditures, remains at work in a model with ex post moral hazard. The optimal insurance contract takes the form of a system of “implicit deductibles”, resulting in the same indemnities as a contract with full insurance above a variable deductible positively related to the elasticity of medical expenditures with respect to the insurance rate. In a model with a predefined ceiling on expenses, there is no reimbursement for expenses below the stop-loss amount. One motivation to have some insurance below the deductible arises if regular health care expenditures in a situation of standard health have a negative effect on the probability of getting into a state with large medical expenses. Copyright Springer Science+Business Media New York 2013(This abstract was borrowed from another version of this item.)