Arrow's theorem of the deductible: moral hazard and stop-loss in health insurance
(2012)
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- Authors
- 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.
- Affiliations
KU Leuven Department of Economics
Citations
Dreze, J., & Schokkaert, E. (2012). Arrow’s theorem of the deductible: moral hazard and stop-loss in health insurance (CORE Discussion Paper 2012/27). https://hdl.handle.net/2078.5/208269