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Arrow’s theorem of the deductible: moral hazard and stop-loss in health insurance

Jacques Dreze and Erik Schokkaert

No 2012027, CORE Discussion Papers from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: We show that the logic of Arrow's theorem of the deductible, i.e. that it is optimal to focus insurance coverage on the states with largest expenditures, remains at work in a model with ex post moral hazard. The optimal insurance contract takes the form of a system of "implicit deductibles", i.e. it results in the same indemnities as a contract with full insurance above a variable deductible positively related to the elasticity of medical expenditures with respect to the insurance rate. In a model with an explicit stop-loss arrangement, i.e. with a predefined ceiling on the annual expenses of the insured, this stop-loss takes the form of a deductible, i.e. there is no reimbursement for expenses below the stop-loss amount. One motivation to have some insurance below the deductible arises if regular health care expenditures in a situation of standard health have a negative effect on the probability of getting into a state with large medical expenses.

Keywords: optimal health insurance; deductible stop-loss; moral hazard (search for similar items in EconPapers)
JEL-codes: I13 (search for similar items in EconPapers)
Date: 2012-07-25
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Journal Article: Arrow’s theorem of the deductible: Moral hazard and stop-loss in health insurance (2013) Downloads
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