Insurance benefits and their impact on health care costs

by Charles E. Phelps

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Increased health insurance coverage and extended benefits have reduced the financial risk faced by consumers of medical care, but have increased the per-unit resource cost of care and increased the total amount of care consumed. It has led to increases in demands for health services, incentives to choose more costly forms of care, possibly reduced incentives for patients to seek optimal preventive care, and obliterated normal market forces that constrain the price of care. Health insurance policies could be structured in ways to provide incentives to patients and doctors to counteract these side effects of health insurance. Deductibles and coinsurance in the ambulatory sector and variable-coverage insurance in the hospital sector are devices that seem to hold promise.

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