1. Coinsurance

2. Cost Sharing Policies Service benefit policies use three cost- sharing features, sometimes in concert: the deductible, the coinsurance rate, cost caps and the stop loss amount

3. Deductible The deductible is the amount that an individual must pay before the insurance company pays anything. The deductible is usually set annually; the typical deductible in 1991 was about $200 for an individual and $500 for a family. Consumers pay the full price for care consumed under the deductible.

4. Coinsurance rate The coinsurance rate is the percentage of the total bill above the deductible that a patient pays. Nearly all indemnity plans had a coinsurance rate of 20 percent.

5. Stop loss The coinsurance is paid until the patient reaches the stop loss - the maximum out-of-pocket payment by the person in a year. A typical stop loss in an indemnity policy was about $1,000 to $1,500 in a year.

6. Caps In addition to these features, many policies impose further cost sharing through caps on various types of expenditures. For example, policies may permit 8 mental health visits per year, or have a $1 million lifetime limit on overall medical expenditures. Such provisions discourage use

7. Cumulative Individual Payments Total Payment Patients Cost Stop-loss Deductible Medical Expenditure Individual Payment Insurer Payment Insurer Payment Coinsurance

8. Risk-sharing features of indemnity insurance policies, 1991 Average/percentCharacteristic $205Individual Deductible $475Family 13%<20 percent Coinsurance rate 78%20 percent 4%>20 percent 21%<$500 Stop loss 30%$500 - $1000 32%$1000 - $2000 17%>$2000 9%<$250,000 Maximum lifetime benefit - individual 6%$250,000 - $1,000,000 85%>$1,000,000

9. Optimal insurance given moral hazard Optimal policyAuthor 58 percent coinsurance rateFeldstein and Friedman (1977) $200 deductible; 25 percent coinsurance rate Buchanan, Keeler et al. (1991) $200 to $300 deductible; 25 percent coinsurance rate; $1,000 stop loss (assumed) Newhouse et al. (1993) 25 percent coinsurance rate; >$25,000 stop loss Manning and Marquis (1996) Cost sharing declines from 27% at roughly $1,000 of spending to 5% above roughly $30,000 Blomqvist (1997)

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