Moral Hazard in insurance, valuebased cost sharing,

1
Moral Hazard in insurance, value-based cost
sharing, the benefits of blissful ignorance
Journal of Health Economics 27, December 2008,
1407 -1417 by Dr. Mark V. Pauly, Dr. Fredric E.
Blavin
2
Synopsis

• Conventional theory Optimal coinsurance rates
  for health insurance w/ moral hazard indicates
  that it should vary w/ price-elasticity of demand
  for M
• Value-based cost sharing Coinsurance should be
  lower for services with higher MB relative to
  costs
• This story/paper attempts to reconcile the two
  views
• Optimal coinsurance is under both theories if
  patient demands are based on correct information
• VBCS- can be superior to providing info when
  patient demands fall short of informed demands

3
Key Concepts

• optimal insurance insurance that maximizes
  consumer welfare (generally in the sense of
  expected utility)
• Zeckhauser Model 1970 study, that emphasized the
  desirability of departing from uniform cost
  sharing (ignoring the administrative costs of
  doing so)

• Imperfect information Player or in this case,
  patient does not know all the moves (prices,
  illness, etc) that is taking place

4
Optimal Co-Insurance Illustrations Zeckhauser
Model
Graph 1 shows welfare cost larger for illness A
gt B Graph 2 shows welfare cost of AB
Graph 1
Full information demand curves and optimal
coinsurance rates, illness B and illness C.
Full information demand curves and optimal
coinsurance rates, illness A and illness B.
Graph 2
C Co-Insurance D Marginal Benefit MWCB
Welfare cost for illness B MWCA Welfare cost
for illness A
5
The issue of imperfect information
C Co-Insurance D Marginal Benefit MWCB
Welfare cost for illness B MWCA Welfare cost
for illness A
Imperfect information demand curves and
coinsurance rates for patients who underestimate
marginal benefits, illness A and illness B.
C can fall due to underestimate, which leads to
less welfare cost
6
What does all this mean???

• Analysis from the paper as with the graph will
  say Leave underusers in the dark, but inform
  overusers
• This is do to it might actually being better to
  provide information to shrink demand rather than
  deter overuse by exposing people to higher
  coinsurance and more risk

7
To remember

• The model used assumed consumers are identical in
  terms of the expected marginal benefit schedules
  for health their levels of risk aversion.
• If this uniformity is not present (in either
  dimension), optimal coinsurance levels should
  differ
• Their coinsurance rates will rather depend on
  their preference to risks health outcomes
• Even with a better information base for M, it
  will still be complex to design voluntary market
  insurance which is both optimal feasible