Working Paper

Medicine worse than the malady : cure rates, population shifts, and health insurance

Abstract: We examine the welfare effects of the interaction of three types of technological progress in medicine and health insurance; some paradoxes emerge. The model specifies three types of people: W (well); H (sick with high cure rate if treated); and L (sick with low cure rate if treated). There are four insurance modes: Indemnity (I): fully covered treatments for Hs, cash bribes for Ls to forgo treatment); Deductible (D): partially covered treatments for Hs, no treatments for Ls); Zero (Z): no insurance and no treatments); and Full (F): fully covered treatments for Hs and Ls). The three types of technological progress are represented as population shifts from sicker to healthier classes of people; for brevity, we call the shifts L?>W, H?>W, and L?>H, and describe each as follows: ; L?>W: Improved ability to prevent illness among Ls- unambiguously improves welfare and seems to yield intuitive mode sequences. ; H?>W: Improved ability to prevent illness among Hs- unambiguously improves welfare but sometimes yields surprising mode sequences. Examples: F-Z (full insurance when there are many Hs, no insurance when there are fewer Hs); and D-F-D (Hs partially covered, then fully covered, then only partially covered once again. Ls not treated, then treated, then not treated once again.). ; L?>H: Some would-be Ls become more highly treatable Hs. Here, technological progress not only yields surprising mode shifts (e.g., D-Z-I-Z), but the welfare effects of progress are ambiguous. This is because L?>H may lead to more people being treated and cured (a welfare gain), but at a cost of higher premiums for all subscribers (a welfare loss). ; The paradoxical results are in part explained by the fact that utility is a concave function of wealth and a linear function of health.The three shifts could also be interpreted as autonomous demographic changes rather than as technological progress.

Keywords: Insurance, Health; Medical care, Cost of;

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Working Paper

Publication Date: 2000

Number: 00-06