Why ‘Optimal’ Payment for Healthcare Providers Can Never Be Optimal Under Community Rating

Harry Frech and Peter Zweifel

University of California at Santa Barbara, Economics Working Paper Series from Department of Economics, UC Santa Barbara

Abstract: This article extends the received literature on optimal provider payment by accounting for consumer heterogeneity in preferences for health insurance and health care. This heterogeneity breaks down the separation of the relationship between providers and the health insurer and the relationship between consumers and the insurer. Both experimental and market evidence for a high degree of heterogeneity are presented. Given heterogeneity, a uniform policy fails to effectively control moral hazard, while incentives for risk selection created by community rating cannot be neutralized through risk adjustment. Consumer heterogeneity spills over into relationships with providers, such that a uniform contract with providers cannot be optimal either. The decisive condition for ensuring optimality of provider payment is to replace community rating (which violates the principle of marginal cost pricing) by risk-rating of contributions combined with subsidization targeted at high risks with low incomes.

Keywords: Social and Behavioral Sciences; Community Rating; Health Insurance; Optimal Payment (search for similar items in EconPapers)
Date: 2015-04-27
New Economics Papers: this item is included in nep-hea and nep-ias
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Citations: View citations in EconPapers (2)

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Journal Article: Why ‘Optimal’ Payment for Healthcare Providers Can Never be Optimal Under Community Rating (2016)
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