Insurance and Innovation in Health Care Markets
Innovation policy often involves an uncomfortable trade-off between rewarding innovators sufficiently and providing the innovation at the lowest possible price. However, in health care markets with insurance for innovative goods, society may be able to ensure efficient rewards for inventors and the efficient dissemination of inventions. Health insurance resembles a two-part pricing contract in which a group of consumers pay an up-front fee ex ante in exchange for a fixed unit price ex post. This functions as if innovators themselves wrote efficient two-part pricing contracts, where they extracted sufficient profits from the ex ante payment, but still sold the good ex post at marginal cost. As a result, we show that complete, efficient, and competitive health insurance for innovative products - such as new drugs, medical devices, or patented procedures - can lead to perfectly efficient innovation and utilization, even when moral hazard exists. Conversely, incomplete insurance markets in this context lead to inefficiently low levels of innovation. Moreover, optimally designed public health insurance for innovative products can solve the innovation problem by charging ex ante premia equal to consumer surplus, and ex post co-payments at or below marginal cost. When these quantities are unknown, society can usually improve static and dynamic welfare by covering the uninsured with contracts that mimic observed private insurance contracts.
|Date of creation:||Sep 2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
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.:
- Martin Gaynor & Deborah Haas-Wilson & William B. Vogt, 2000.
"Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second-Best in Health Care Markets,"
Journal of Political Economy,
University of Chicago Press, vol. 108(5), pages 992-1005, October.
- Martin Gaynor & Deborah Haas-Wilson & William B. Vogt, 1998. "Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second Best in Health Care Markets," NBER Working Papers 6865, National Bureau of Economic Research, Inc.
- Wright, Brian Davern, 1983. "The Economics of Invention Incentives: Patents, Prizes, and Research Contracts," American Economic Review, American Economic Association, vol. 73(4), pages 691-707, September.
- Tomas Philipson & Stephane Mechoulan, 2003. "Intellectual Property & External Consumption Effects: Generalizations from Pharmaceutical Markets," NBER Working Papers 9598, National Bureau of Economic Research, Inc.
- Oi, Walter Y, 1971. "A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 85(1), pages 77-96, February.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:11602. 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: ()
If references are entirely missing, you can add them using this form.