The Effects of Capping Co-Insurance Payments

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.