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Incentivizing efficient utilization without reducing access: The case against cost-sharing in insurance

Listed author(s):
  • Fels, Markus Peter

Cost-sharing is regarded as an important tool to reduce moral hazard in health insurance. Contrary to standard prediction, however, such requirements are found to decrease utilization both of efficient and of inefficient care. I employ a simple model that incorporates two possible explanations - consumer mistakes and limited access - to assess the welfare implications of different insurance designs. I find cost-sharing never to be an optimal solution as it produces two novel inefficiencies by limiting access. An alternative design, relying on bonuses, has no such side effects and achieves the same incentivization.

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File URL: https://www.econstor.eu/bitstream/10419/163555/1/894217526.pdf
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Paper provided by Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering in its series Working Paper Series in Economics with number 105.

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Date of creation: 2017
Handle: RePEc:zbw:kitwps:105
Contact details of provider: Web page: http://www.wiwi.kit.edu/

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  1. Zarek C. Brot-Goldberg & Amitabh Chandra & Benjamin R. Handel & Jonathan T. Kolstad, 2017. "What does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 132(3), pages 1261-1318.
  2. Chandra, Amitabh & Gruber, Jonathan & McKnight, Robin, 2014. "The impact of patient cost-sharing on low-income populations: Evidence from Massachusetts," Journal of Health Economics, Elsevier, vol. 33(C), pages 57-66.
  3. Fels, Markus, 2015. "Mental accounting, access motives, and overinsurance," Working Paper Series in Economics 69, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
  4. Peele, Pamela B., 1993. "Evaluating welfare losses in the health care market," Journal of Health Economics, Elsevier, vol. 12(2), pages 205-208, July.
  5. Johnson, Eric J & Hershey, John & Meszaros, Jacqueline & Kunreuther, Howard, 1993. "Framing, Probability Distortions, and Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 35-51, August.
  6. Pauly, Mark V. & Blavin, Fredric E., 2008. "Moral hazard in insurance, value-based cost sharing, and the benefits of blissful ignorance," Journal of Health Economics, Elsevier, vol. 27(6), pages 1407-1417, December.
  7. Zweifel, Peter, 1987. "Bonus systems in health insurance: a microeconomic analysis," Health Policy, Elsevier, vol. 7(2), pages 273-288, April.
  8. Rubinstein, Ariel & Yaari, Menahem E., 1983. "Repeated insurance contracts and moral hazard," Journal of Economic Theory, Elsevier, vol. 30(1), pages 74-97, June.
  9. Nyman, John A., 1999. "The value of health insurance: the access motive," Journal of Health Economics, Elsevier, vol. 18(2), pages 141-152, April.
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