Insurance as Delegated Purchasing: Theory and Evidence from Health Care

39 Pages Posted: 24 Feb 2012

See all articles by Robin McKnight

Robin McKnight

Wellesley College; National Bureau of Economic Research (NBER)

Jonathan Reuter

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Eric Zitzewitz

Dartmouth College; NBER

Date Written: February 2012

Abstract

Household demand for actuarially unfair insurance against small risks has long puzzled economists. One way to potentially rationalize this demand is to recognize that (non-life) insurance is an incentive-compatible means of engaging an expert buyer. To quantify the benefits of expert buying, we compare prices paid by the insured and uninsured for health care. In categories of health care where uncompensated care is more difficult to obtain (drugs, doctor office visits, and hospital outpatient visits), we find that insurers pay 10-20% less than the uninsured. For forms of care where payment by the uninsured is more likely to be negotiated after services are rendered (hospitalizations and emergency room visits) the uninsured pay about 30% less on average, due largely to the nontrivial share of uninsured who pay 5% or less of their billed charges. At least in settings where free services are difficult to obtain, expert buying is an important benefit of insurance. We discuss the implications of the delegated-purchasing view of insurance for con-sumer-driven health insurance and for self-insurance by employers.

Suggested Citation

McKnight, Robin and Reuter, Jonathan and Zitzewitz, Eric W., Insurance as Delegated Purchasing: Theory and Evidence from Health Care (February 2012). NBER Working Paper No. w17857, Available at SSRN: https://ssrn.com/abstract=2010389

Robin McKnight (Contact Author)

Wellesley College ( email )

106 Central Street
Wellesley, MA 02181
United States

National Bureau of Economic Research (NBER)

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Jonathan Reuter

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Eric W. Zitzewitz

Dartmouth College ( email )

Hanover, NH 03755
United States
603-646-2891 (Phone)
603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~ericz

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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