Premium subsidies for health insurance: excessive coverage vs. adverse selection.
The tax subsidy for employment-related health insurance can lead to excessive coverage and excessive spending on medical care. Yet, the potential also exists for adverse selection to result in the opposite problem-insufficient coverage and underconsumption of medical care. This paper uses the model of Rothschild and Stiglitz (R-S) to show that a simple linear premium subsidy can correct market failure due to adverse selection. The optimal linear subsidy balances welfare losses from excessive coverage against welfare gains from reduced adverse selection. Indeed, a capped premium subsidy may mitigate adverse selection without creating incentives for excessive coverage.
Selden
T M
TM
Agency for Health Care Policy and Research, Rockville, MD 20852, USA. tselden@ahcpr.gov
D005249:Fees and Charges / Q000706:statistics & numerical data; D006264:Health Benefit Plans, Employee / Q000191:economics* / Q000706:statistics & numerical data; D006301:Health Services Needs and Demand / Q000191:economics* / Q000706:statistics & numerical data; D006801:Humans; D019458:Insurance Coverage / Q000191:economics* / Q000706:statistics & numerical data; D018803:Models, Economic; D012306:Risk; D013660:Taxes