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Loss reduction and implicit deductibles in medical insurance

Jacques Dreze

No 2002005, CORE Discussion Papers from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This note presents a modest extension of the very useful "theorem of the deductible" (Arrow, American Economic Review, 1963). The extension concerns ex post moral hazard in medical insurance. Under full insurance above a deductible, the marginal cost of treatment to the insured is zero, resulting in over-consumption. Co-insurance is the standard approach to mitigate that problem. Assuming that resources and consumption preferences are independent of health (to separate medical insurance from disability insurance), the optimal co-insurance contract results in the same indemnities as a contract with 100% coverageabove a variable deductible, related positively to the elasticity of medical expenditures withresp ect to the coverage rate.

Keywords: health insurance; deductibles; moral hazard (search for similar items in EconPapers)
Date: 2002-01
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