Health insurance: The tradeoff between risk pooling and moral hazard

Manning, Willard G.; Marquis, M. Susan

doi:10.1016/s0167-6296(96)00497-3

Cited by 203 publications

(130 citation statements)

References 34 publications

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“…Based on the RAND Health Insurance Study, Manning and Marquis [13] estimated the optimal rate of copayment (i.e. where the difference between the risk premium and the efficiency loss due to moral hazard is maximum) to be 50 %.…”

Section: Self-rationing As the Rational Alternativementioning

confidence: 99%

Rationing of health care: is there an economic rationality to it?

Zweifel

2015

Eur J Health Econ

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The point of departure of this Editorial is the fact that we all are engaged in self-rationing in our everyday lives. We would like to spend more money on all sorts of nice things and devote more time to our cherished activities. Imposed rationing is characteristic of wartime governments, who seek to prevent the rich from gobbling up the resources left by the army. Since the publication in 1987 of David Callahan's Setting Limits: Medical Goals in an Aging Society (Callahan, Setting limits: medical goals in an aging society, Simon & Schuster, New York, 1987), rationing of health care has become a widely debated issue (the Internet is full of pertinent entries). While rationing has also been addressed by health economists, there are three puzzling observations. First, Callahan (Callahan, Setting limits: medical goals in an aging society, Simon & Schuster, New York, 1987) wrote for an American audience whereas rationing was introduced by the British National Health Service (NHS) well before 1987, with little debate. Second, the economic theory of rationing had been laid out by James Tobin [Ectrica 20(4): 521-533, 1952] as early as 1952-but health economists seem to have neglected his groundwork when writing about rationing. Third, they accept government-imposed rationing as inevitable in the case of health care, as though the selfrationing alternative was unavailable. An attempt is made here to provide rational explanations for these puzzles.Demand for rationing is induced by health insurance (and even more so, NHS provision)A well-known side effect of insurance is moral hazard. In the case of health, consider Mr X who is willing to pay €100 out of pocket for a drug, and let the rate of copayment be 33 percent. Evidently, the drug may cost as much as €300 at the pharmacy, and Mr X will still buy it. In this case, insured patients' marginal willingness to pay is inflated by a factor of three, the inverse of the rate of copayment. In Fig. 1, the 'true' demand function D oop (reflecting marginal willingness to pay out of pocket) is swiveled around to become the observed demand function D obs Ins (as seen by the pharmacist in the example). Given a positively sloped supply function S, the market equilibrium moves from E to E Ins . The prediction is clear: health insurance coverage causes an increase in the price of health care p M , the quantity of healthcare services M transacted, and hence healthcare expenditure HCE ¼ p M Â M. These effects are the more pronounced, the lower the rate of copayment.In a NHS promising access to care free of charge (as the British NHS originally did), observed demand does not react to price. Therefore, D obs NHS runs vertical, giving rise to equilibrium at E NHS which reflects even stronger moral hazard effects than the insurance-cum-copayment alternative. In the words of NHS historian Geoffrey Rivett [19], writing about the 1960s, ''Costs kept rising. The BMJ (British Medical Journal) believed that, ignoring the British capacity for muddling through, the NHS was heading in the...

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Section: Self-rationing As the Rational Alternativementioning

confidence: 99%

Rationing of health care: is there an economic rationality to it?

Zweifel

2015

Eur J Health Econ

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“…Without recognition of this income effect, the voluntary purchase of health insurance at traditional coverage parameters appears to reduce welfare (Feldstein, 1973;Feldman and Dowd, 1991;Manning and Marquis, 1996) because all the additional medical care purchased is assumed to be in response to the willingness to substitute medical care for other goods and services as relative prices change. As such, it could only mean that the additional care purchased with insurance is not worth the cost of producing it.…”

Section: Discussionmentioning

confidence: 99%

Health Insurance Theory: The Case of the Vanishing Welfare Gain

Nyman

2003

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractThis paper presents theory that an important source of value is missing from conventional theory of the demand for health insurance, namely, the effect of the transfer of income (from those who purchase insurance and remain healthy to those who purchase insurance and become ill) on purchases of medical care. Because the portion of moral hazard that is attributable to income is welfare increasing and would replace some of moral hazard that is spuriously deemed to be welfare decreasing, the new theory suggests that the value of health insurance has been dramatically undervalued. Implications for policy are outlined.

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“…Demand elasticities show that PHI appears to be quite insensitive to premium variations. The interpretation following Manning and Marquis (1996) [27] is that the larger the price elasticity ceteris paribus, the greater the welfare loss resulting from more generous health insurance. Consistently with previous evidence quality of care is a normal good and income elasticity are higher than one, suggesting that PHI is a luxury good, which is consistent as well with some previous studies based on aggregate demand analysis [17].…”

Section: Discussionmentioning

confidence: 99%

“…Therefore, the higher risk aversion individual face, the more likely she will purchase health insurance. Manning and Marquis (1996) [27] directly estimated the revealed risk aversion parameter using experimental data on insurance preferences over full coverage and catastrophic limit insurance. Propper (1993) [12] measured attitudes towards risk by means of a dummy variable asking the respondent to report whether an individual would consider paying for private health insurance at the point of demand.…”

Section: Attitudes Towards Riskmentioning

confidence: 99%

Demand for Private Health Insurance: Is there a Quality Gap?

Costa

Garcıá

2001

SSRN Journal

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SummaryQuality of care is qualified as a main determinant of the demand for voluntary private health insurance (PHI) in National Health Systems (NHS). This paper provides new evidence on the influence of the quality gap between public and private health insurance and other demand determinants in the demand for PHI in Catalonia. The demand for PHI is modelled as a demand for health care quality. Unlike previous studies, the database employed allows for the development of a link between the theoretical and the empirical model dealing with unobserved heterogeneity and endogeneity issues. Results suggest that a rise in PHI quality enhances an equivalent influence in the demand for PHI as an equal reduction of NHS quality.Income and price elasticity estimates are consistent with the observed feature that PHI appears to be a luxury good and individuals tend to be relatively insensible to tax relief's and monetary co-payments in insurance contracts.

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Health insurance: The tradeoff between risk pooling and moral hazard

Cited by 203 publications

References 34 publications

Rationing of health care: is there an economic rationality to it?

Rationing of health care: is there an economic rationality to it?

Health Insurance Theory: The Case of the Vanishing Welfare Gain

Demand for Private Health Insurance: Is there a Quality Gap?

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