Co-payment systems in health care: between moral hazard and risk reduction

Ed Westerhout () and Kees Folmer ()

CPB Discussion Papers from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: It is well-known that co-payments in health insurance may increase social welfare by reducing moral hazard. Considerably less is known about the form co-payment schemes should ideally take. This paper investigates what co-payment rate and co-payment maximum characterize the optimal scheme, i.e. the scheme that achieves the highest level of social welfare, within the class of two-part co-payment schemes of which the second part features a zero rate. It also quantifies the welfare losses that correspond with sub-optimal co-payment schemes. The paper uses a model with optimizing households that are risk-averse, exercise priceelastic demand and are aware of the kinks in their budget constraints. Numerical simulations with this model indicate that the optimal scheme combines a 80% rate with a maximum of about 600 euro. Sensitivity analysis shows that the maximum varies a lot with changes in basic parameters; the 80% value for the optimal co-payment rate is quite robust, though. The welfare losses that correspond to alternative co-payment schemes are generally quite small.

Keywords: Moral Hazard; Deductibles; Co-payments (search for similar items in EconPapers)
JEL-codes: D60 H21 I18 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hea and nep-ias
Date: 2007-02
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Persistent link: http://EconPapers.repec.org/RePEc:cpb:discus:78

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