Should medical care be free?: cost sharing and health financing policy

by Joseph P. Newhouse

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Debate over the wisdom of having patients pay for some or all of their medical care has persisted for many years. At the heart of the problem is the dilemma of protecting the individual against the risk of medical bills while also trying to provide physicians, hospitals, and other medical providers with incentives for efficient production. Free medical care provides maximum protection against risk, but minimum incentive for efficient production. A sufficiently large deductible, by contrast, exposes the individual to risk, but does provide a basis for price competition for outpatient services and thus an incentive for efficient production. Nonetheless, even a reasonably large deductible leaves the hospital sector with only a weak incentive for efficient production, once the patient has been admitted. Various devices, such as indemnity insurance, might strengthen incentives for hospitals to produce efficiently, but because such devices are not now widespread, one suspects they may be impractical.

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