The Welfare Loss of Excess Health Insurance

TLDR

American families are generally overinsured against health expenses, and reducing coverage would increase risk‑utility loss more than the gains from lower prices and reduced excess care consumption. The paper develops and estimates a structural equation for health‑care demand and evaluates how insurance changes influence the demand and supply of health care. It then estimates welfare gains from raising the average coinsurance rate from 33 % to 50 % and 67 %. The analysis indicates that the most likely values imply net welfare gains exceeding $4 billion.

Abstract

American families are in general overinsured against health expenses. If insurance coverage were reduced, the utility loss from increased risk would be more than outweighted by the gain due to lower prices and the reduced purchase of excess care. The first part of the paper develops and estimates a structural equation for the demand for health care and then examines the dynamic interaction between the purchase of insurance and the demand and supply for health care. The second part estimates the welfare gains that would result from decreasing insurance by raising the average coinsurance rate from 0.33 to 0.50 and 0.67 percent. The most likely values imply net gains in excess of $4 billion.