title: Optimal health insurance: the case of observable, severe illness.
abstract: We explore optimal cost-sharing provisions for insurance contracts when individuals have observable, severe diseases with a discrete number of medically appropriate treatment options. Variation in preferences for alternative treatments is unobserved by the insurer and non-contractible. Interest in such situations is increasingly common, exemplified by disease carve-out programs and shared decision-making (SDM) tools. We demonstrate that optimal insurance charges a copay to patients choosing the high-cost treatment and provides consumers of the low-cost treatment a cash payment. A simulation of the effect of such a policy, based on prostate cancer, indicates a substantial reduction in moral hazard.
authors.affiliation: Department of Health Management and Policy, University of Michigan, Ann Arbor 48109, USA. mchernew@sph.umich.edu
authors.forename: M E
authors.initials: ME
authors.lastname: Chernew
authors.forename: W E
authors.initials: WE
authors.lastname: Encinosa
authors.forename: R A
authors.initials: RA
authors.lastname: Hirth
mesh_terms: D017047:Cost Sharing; D003657:Decision Making; D003669:Deductibles and Coinsurance / Q000191:economics; D019468:Disease Management; D005249:Fees and Charges; D006801:Humans; D007348:Insurance, Health / Q000191:economics* / Q000592:standards; D008297:Male; D017059:Models, Econometric; D009014:Morals; D017060:Patient Satisfaction / Q000191:economics*; D011471:Prostatic Neoplasms / Q000191:economics / Q000628:therapy