Medicine worse than the malady : cure rates, population shifts, and health insurance
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.
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National Bureau of Economic Research, Inc.
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- 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.
- 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.
- David M. Cutler, 1996. "Public Policy for Health Care," NBER Working Papers 5591, National Bureau of Economic Research, Inc.
- 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. Full references (including those not matched with items on IDEAS)
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