Value Based Cost Sharing Meets the Theory of Moral Hazard: Medical Effectiveness in Insurance Benefits Design / Mark V. Pauly, Fredric E. Blavin.

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Pauly, Mark V

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w13044.Publication details: Cambridge, Mass. National Bureau of Economic Research 2007.Description: 1 online resource: illustrations (black and white)Subject(s):

I11 - Analysis of Health Care Markets

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Abstract: The conventional theory of optimal coinsurance rates in health insurance in the presence of moral hazard indicates that, in situations of equal risk characteristics, coinsurance should vary if the price-responsiveness or price-elasticity of demand for different medical services varies, and should be larger for the more price responsive services. An alternative theory called "value-based cost sharing" indicates that coinsurance should be lower for services with higher (marginal) benefits relative to costs. This paper reconciles the two views. It shows that, if patient demands are based on correct information on benefits and costs, the conclusion of the conventional view is identical to the conclusion from the value-based approach. If patient demands differ from correct demands, it is shown that optimal coinsurance depends both on the extent and direction of information imperfection and on price-responsiveness or price elasticity. The paper also shows, as an alternative to adjusting coinsurance to deal with information imperfection, that providing better information which affects patient demands can be superior if uninformed patient demands exceed informed patient demands, but value based cost sharing can be superior to providing information (even if the cost of information is minimal) when patient demands fall short of informed demands. An extended numerical example illustrates these points.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w13044 (Browse shelf(Opens below))	Not For Loan

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April 2007.

The conventional theory of optimal coinsurance rates in health insurance in the presence of moral hazard indicates that, in situations of equal risk characteristics, coinsurance should vary if the price-responsiveness or price-elasticity of demand for different medical services varies, and should be larger for the more price responsive services. An alternative theory called "value-based cost sharing" indicates that coinsurance should be lower for services with higher (marginal) benefits relative to costs. This paper reconciles the two views. It shows that, if patient demands are based on correct information on benefits and costs, the conclusion of the conventional view is identical to the conclusion from the value-based approach. If patient demands differ from correct demands, it is shown that optimal coinsurance depends both on the extent and direction of information imperfection and on price-responsiveness or price elasticity. The paper also shows, as an alternative to adjusting coinsurance to deal with information imperfection, that providing better information which affects patient demands can be superior if uninformed patient demands exceed informed patient demands, but value based cost sharing can be superior to providing information (even if the cost of information is minimal) when patient demands fall short of informed demands. An extended numerical example illustrates these points.