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Why ‘Optimal’ Payment for Healthcare Providers Can Never Be Optimal Under Community Rating

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  • Frech, Ted E
  • Zweifel, Peter
Abstract
This article extends the received literature on optimal provider payment by accounting for consumer heterogeneity in preferences for health insurance and health care. This heterogeneity breaks down the separation of the relationship between providers and the health insurer and the relationship between consumers and the insurer. Both experimental and market evidence for a high degree of heterogeneity are presented. Given heterogeneity, a uniform policy fails to effectively control moral hazard, while incentives for risk selection created by community rating cannot be neutralized through risk adjustment. Consumer heterogeneity spills over into relationships with providers, such that a uniform contract with providers cannot be optimal either. The decisive condition for ensuring optimality of provider payment is to replace community rating (which violates the principle of marginal cost pricing) by risk-rating of contributions combined with subsidization targeted at high risks with low incomes.

Suggested Citation

  • Frech, Ted E & Zweifel, Peter, 2015. "Why ‘Optimal’ Payment for Healthcare Providers Can Never Be Optimal Under Community Rating," University of California at Santa Barbara, Economics Working Paper Series qt37b9q0k3, Department of Economics, UC Santa Barbara.
    • Handle: RePEc:cdl:ucsbec:qt37b9q0k3
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    Cited by:

    1. H. E. Frech & Peter Zweifel, 2017. "Market Socialism and Community Rating in Health Insurance," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 59(3), pages 405-427, September.
    2. Neustadt, Ilja & Zweifel, Peter, 2018. "Redistribution in Whose Favor? Preferences with Regard to Nationality and Type of Beneficiaries," MPRA Paper 119465, University Library of Munich, Germany.
    3. repec:pra:mprapa:91766 is not listed on IDEAS
    4. Peter Zweifel, 2018. "The triple challenge of mental health," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 19(3), pages 309-313, April.
    5. Peter Zweifel, 2016. "‘Catastrophic’ healthcare expenditure: critique of a problematic concept and a proposal," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 17(5), pages 519-520, June.

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    Keywords

    Social and Behavioral Sciences; Community Rating; Health Insurance; Optimal Payment;
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