Welfare Analysis of Changes in Health Coinsurance Rates

by Kenneth Arrow

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This report develops a general equilibrium theory of demand for and supply of medical care when medical care purchases are insured by a plan with a coinsurance rate [r]. The report then investigates welfare effects of a change in [r]. Random levels of health are considered, and utility is allowed to vary with the state of health. If supply is totally inelastic, decreases in coinsurance only transfer income to suppliers of medical care with no changes in welfare or efficiency. For other supply elasticities, welfare effects depend upon both supply and demand elasticities and upon the health status-marginal utility of income covariance. It is also shown that welfare unambiguously increases with the introduction of some insurance coverage, but the optimal level of coverage cannot be determined theoretically.

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