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Medicine worse than the malady : cure rates, population shifts, and health insurance

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  • Robert F. Graboyes

Abstract

We examine the welfare effects of the interaction of three types of technological progress in medicine and health insurance; some paradoxes emerge. The model specifies three types of people: W (well); H (sick with high cure rate if treated); and L (sick with low cure rate if treated). There are four insurance modes: Indemnity (I): fully covered treatments for Hs, cash bribes for Ls to forgo treatment); Deductible (D): partially covered treatments for Hs, no treatments for Ls); Zero (Z): no insurance and no treatments); and Full (F): fully covered treatments for Hs and Ls). The three types of technological progress are represented as population shifts from sicker to healthier classes of people; for brevity, we call the shifts L—>W, H—>W, and L—>H, and describe each as follows: ; L—>W: Improved ability to prevent illness among Ls- unambiguously improves welfare and seems to yield intuitive mode sequences. ; H—>W: Improved ability to prevent illness among Hs- unambiguously improves welfare but sometimes yields surprising mode sequences. Examples: F-Z (full insurance when there are many Hs, no insurance when there are fewer Hs); and D-F-D (Hs partially covered, then fully covered, then only partially covered once again. Ls not treated, then treated, then not treated once again.). ; L—>H: Some would-be Ls become more highly treatable Hs. Here, technological progress not only yields surprising mode shifts (e.g., D-Z-I-Z), but the welfare effects of progress are ambiguous. This is because L—>H may lead to more people being treated and cured (a welfare gain), but at a cost of higher premiums for all subscribers (a welfare loss). ; The paradoxical results are in part explained by the fact that utility is a concave function of wealth and a linear function of health.The three shifts could also be interpreted as autonomous demographic changes rather than as technological progress.

Suggested Citation

  • Robert F. Graboyes, 2000. "Medicine worse than the malady : cure rates, population shifts, and health insurance," Working Paper 00-06, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:00-06
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    References listed on IDEAS

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    1. 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.
    2. David M. Cutler, 1996. "Public Policy for Health Care," NBER Working Papers 5591, National Bureau of Economic Research, Inc.
    3. Gianfrancesco, Frank D., 1983. "A proposal for improving the efficiency of medical insurance," Journal of Health Economics, Elsevier, vol. 2(2), pages 175-184, August.
    4. Goddeeris, John H, 1984. "Medical Insurance, Technological Change, and Welfare," Economic Inquiry, Western Economic Association International, vol. 22(1), pages 56-67, January.
    5. Feldstein, Martin S, 1973. "The Welfare Loss of Excess Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 251-280, Part I, M.
    6. David M. Cutler & Louise Sheiner, 1998. "Managed Care and the Growth of Medical Expenditures," NBER Chapters,in: Frontiers in Health Policy Research, Volume 1, pages 77-116 National Bureau of Economic Research, Inc.
    7. Randall P. Ellis & Thomas G. McGuire, 1993. "Supply-Side and Demand-Side Cost Sharing in Health Care," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 135-151, Fall.
    8. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
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    Keywords

    Insurance; Health ; Medical care; Cost of;

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