The Effects of Capping Co-Insurance Payments
CentER Discussion Paper Series No. 2018-050
42 Pages Posted: 14 Dec 2018
Date Written: November 22, 2018
It is common to limit the cost sharing in health insurance schemes by a cap on co-insurance payments. This paper derives the economic and welfare effects of such a cap, adopting a model of which two features are crucial. First, health care demand is price-elastic. Second, demand is less elastic the worser the consumer’s health status. The paper derives that a cap induces optimizing health insurers to raise the co-insurance rate. This raises welfare in the aggregate, but part of the consumers do not share in this welfare gain. In particular, those with health spending close to the level at which co-insurance payments reach their maximum level suffer large welfare losses. We adopt a 3-state model to derive our results and a continuous-state model for a numerical illustration.
Keywords: Coinsurance, Health Insurance, Cap on Coinsurance Payments
JEL Classification: D60, H21, I18
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