CPB Netherlands Bureau for Economic Policy Analysis Why it may hurt to be insured the effects of capping coinsurance payments Ed Westerhout and Kees Folmer KAFEE seminar, March 2, 2015, UvA

CPB Netherlands Bureau for Economic Policy Analysis Cost sharing and caps: theory Standard model (Arrow (1963, 1968), Pauly (1968), Zeckhauser (1970)): – first-best insurance – first-best impossible due to a lack of information – second-best insurance implies moral hazard Cost sharing: – reduces moral hazard – implies very high spending in case of bad health

CPB Netherlands Bureau for Economic Policy Analysis Cost sharing and caps: theory A cap might be interesting: – Small effect on moral hazard – Large effect on financial risk

CPB Netherlands Bureau for Economic Policy Analysis Cost sharing and caps: practice Many health insurance schemes apply some sort of cost sharing: – copayments – coinsurance payments – deductibles Caps are also common – US – Netherlands – OECD: Austria, Finland, Iceland, Ireland, Norway, Sweden and Switzerland

CPB Netherlands Bureau for Economic Policy Analysis Beyond the standard model Suppliers of health care services (Ellis and McGuire (1990)) Offset effects (Newhouse (2006), Chandra et al. (2010)) Lack of will power, information imperfections on part of consumers (Newhouse (2006), Pauly and Blavin (2008))

CPB Netherlands Bureau for Economic Policy Analysis This paper Explore the economic and welfare effects of a cap on coinsurance payments – at the macro level (of a heterogeneous population) – at the micro level (of individual members of that population) We achieve qualitative results by exploring a stylized model with three states We achieve quantitative effects by exploring a more general model with a continuum of states

CPB Netherlands Bureau for Economic Policy Analysis The model Model is very much standard: – no role for suppliers of health care services – no offset effects – no information imperfections (except for the insurers who have zero information) Model distinguishes two groups of agents: – a continuum of health care consumers – health care insurers operating in a perfectly competitive sector

CPB Netherlands Bureau for Economic Policy Analysis Health care consumers

CPB Netherlands Bureau for Economic Policy Analysis Utility of the consumer

CPB Netherlands Bureau for Economic Policy Analysis Budget constraint

CPB Netherlands Bureau for Economic Policy Analysis Health care demand

CPB Netherlands Bureau for Economic Policy Analysis Expected utility

CPB Netherlands Bureau for Economic Policy Analysis Optimal coinsurance rate

CPB Netherlands Bureau for Economic Policy Analysis Health care demand in numerical model

CPB Netherlands Bureau for Economic Policy Analysis Health care demand in numerical model

CPB Netherlands Bureau for Economic Policy Analysis Expected utility in numerical model

CPB Netherlands Bureau for Economic Policy Analysis Health insurers in numerical model

CPB Netherlands Bureau for Economic Policy Analysis Calibration of the model Parameter values are chosen such as to replicate basic stylized facts This implies that the price elasticity of health care demand, evaluated at average spending equals about -0,10 in case of outpatient care about -0,01 in case of all care Relative risk aversion towards non-medical consumption, evaluated at average spending, equals 2

CPB Netherlands Bureau for Economic Policy Analysis Welfare measure Welfare is measures by the compensating variation: how much euro is the person living under the optimal scheme willing to give away in order to prevent to be shifted to some alternative scheme (e.g., the initial scheme)? We apply this measure at the aggregate level in order to assess the efficiency of the reform at the individual level in order to assess distributional effects

CPB Netherlands Bureau for Economic Policy Analysis Optimal linear insurance (without a cap) b (%)y{ZI}y{FI} BM SA(10-55)(30-211)(8-64) Sensitivity analysis (SA): Variations in risk aversion, price elasticity of health care demand, standard deviation of health care spending, probability of outpatient versus outpatient+inpatient care

CPB Netherlands Bureau for Economic Policy Analysis Introducing a cap b (%)3055 Cap-€ 3,250 Health care spending€ 942€ 925 Coinsurance payments€ 283€ 396 Insurance premium€ 660€ 530

CPB Netherlands Bureau for Economic Policy Analysis Optimal nonlinear insurance (with a cap) b (%)y (€)y_O (€)y_A (€) BM30 --> SA(increase)(0-22)(-65 – 95)( )

CPB Netherlands Bureau for Economic Policy Analysis Heterogeneity of welfare effects b (%)y (€)y_O (€)y_A (€) BM30 --> Maximum loss SA(0-22)(-4 – -1796)( )

CPB Netherlands Bureau for Economic Policy Analysis [include figure] What

CPB Netherlands Bureau for Economic Policy Analysis Results Introducing a cap has only modest welfare effects at the aggregate level Effects at the individual level may be much larger Largest losses occur for those who spend at the level at which the maximum of coinsurance copayments starts to apply Policymakers may want to look for other instruments than caps on coinsurance payments to raise efficiency