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- Title
Reimbursing Health Plans and Health Providers: Efficiency in Production Versus Selection.
- Authors
Newhouse, Joseph P.
- Abstract
One of the best known tradeoffs in insurance economics is between risk aversion and moral hazard. Greater insurance coverage implies less risk bearing by the insured but induces greater moral hazard. As a corollary, the less demand responds to price, the greater should be the coverage of the loss (Zeckhauser 1970; Ehrlich and Becker 1972; Pauly 1986). The tradeoff between risk aversion and moral hazard has given rise to much health economics literature on the desirability of cost sharing in health insurance, i.e., the price to the insured at the time of use, and we now know a good bit empirically about this tradeoff (Newhouse and the Insurance Experiment Group 1993, ch. 4). Perhaps based on these findings, many now believe that some initial cost sharing is optimal; the outcome should not be the comer solution of no cost sharing (e.g., U.S. Bipartisan Commission on Comprehensive Health Care 1990, p. 63). This paper argues that widespread health insurance creates another important tradeoff, less well recognized in the literature, between efficiency in production and selection. By efficiency in production, I mean least cost treatment of a patient's medical problem, holding quality constant. Thus, efficiency includes the quantity of services used to treat the problem, as well as the unit price of those services. By selection, I mean actions of economic agents on either side of the market to exploit unpriced risk heterogeneity and break pooling arrangements, with the result that some consumers may not obtain the insurance they desire. Whereas the essence of the moral hazard-risk aversion tradeoff is captured by the cost that the patient bears at the time of use, e.g., the size of a deductible, the essence of the selection-efficiency tradeoff is captured by the cost the health plan or medical provider bears at the time of use, or the amount of supply-side cost sharing, to use the term of Ellis and McGuire (1993). Analogous to coinsurance on the demand side, supply-side cost sharing in its simplest form is a linear combination of fee-for-service and capitation pricing, but nonlinear schedules are obviously possible. This paper largely concerns the tradeoff between these two bases of pricing in both the health insurance and the medical care delivery markets.
- Subjects
INSURANCE; ECONOMICS; RISK aversion; MORAL hazard; COST shifting; HEALTH insurance; SUPPLY-side economics; MEDICAL care
- Publication
Journal of Risk & Insurance, 1996, Vol 63, Issue 4, p704
- ISSN
0022-4367
- Publication type
Book Review