The Effects of Capping Co-Insurance Payments

Ed Westerhout, Kees Folmer

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Abstract

It is common to limit the cost sharing in health insurance schemes by a cap on
co-insurance payments. This paper derives the economic and welfare effects of
such a cap, adopting a model of which two features are crucial. First, health
care demand is price-elastic. Second, demand is less elastic the worser the
consumer’s health status. The paper derives that a cap induces optimizing
health insurers to raise the co-insurance rate. This raises welfare in the
aggregate, but part of the consumers do not share in this welfare gain. In
particular, those with health spending close to the level at which co-insurance
payments reach their maximum level suffer large welfare losses. We adopt a 3-
state model to derive our results and a continuous-state model for a numerical
illustration.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages42
Volume2018-050
Publication statusPublished - 22 Nov 2018

Publication series

NameCentER Discussion Paper
Volume2018-050

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Keywords

  • coinsurance
  • health insurance
  • cap on coinsurance payments
  • moral hazard

Cite this

Westerhout, E., & Folmer, K. (2018). The Effects of Capping Co-Insurance Payments. (CentER Discussion Paper; Vol. 2018-050). Tilburg: CentER, Center for Economic Research.