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Why ‘Optimal’ Payment for Healthcare Providers Can Never be Optimal Under Community Rating

Abstract

This article extends the existing literature on optimal provider payment by accounting for consumer heterogeneity in preferences for health insurance and healthcare. This heterogeneity breaks down the separation of the relationship between providers and the health insurer and the relationship between consumers and the insurer. Both experimental and market evidence for a high degree of heterogeneity are presented. Given heterogeneity, a uniform policy fails to effectively control moral hazard, while incentives for risk selection created by community rating cannot be neutralized through risk adjustment. Consumer heterogeneity spills over into relationships with providers, such that a uniform contract with providers also cannot be optimal. The decisive condition for ensuring optimality of provider payment is to replace community rating (which violates the principle of marginal cost pricing) with risk rating of contributions combined with subsidization targeted at high risks with low incomes.

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Correspondence to Peter Zweifel.

Ethics declarations

No funding has been received for this study. Neither H. E Frech nor Peter Zweifel have any conflicts of interest.

Author contributions

H. E. Frech contributed materials on Market Socialism as well as links to the US debate about health insurance reform, while Peter Zweifel wrote most of the text, particularly the discussion of the formulae cited in Sect. 5.

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Zweifel, P., Frech, H.E. Why ‘Optimal’ Payment for Healthcare Providers Can Never be Optimal Under Community Rating. Appl Health Econ Health Policy 14, 9–20 (2016). https://doi.org/10.1007/s40258-015-0207-0

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  • DOI: https://doi.org/10.1007/s40258-015-0207-0

Keywords

  • Moral Hazard
  • Risk Adjustment
  • Health Insurer
  • Community Rating
  • Marginal Cost Price