NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Insurance and Innovation in Health Care Markets

Darius Lakdawalla, Neeraj Sood

NBER Working Paper No. 11602
Issued in September 2005
NBER Program(s):   HC

Innovation policy often involves an uncomfortable trade-off between rewarding innovators sufficiently and providing the innovation at the lowest possible price. However, in health care markets with insurance for innovative goods, society may be able to ensure efficient rewards for inventors and the efficient dissemination of inventions. Health insurance resembles a two-part pricing contract in which a group of consumers pay an up-front fee ex ante in exchange for a fixed unit price ex post. This functions as if innovators themselves wrote efficient two-part pricing contracts, where they extracted sufficient profits from the ex ante payment, but still sold the good ex post at marginal cost. As a result, we show that complete, efficient, and competitive health insurance for innovative products - such as new drugs, medical devices, or patented procedures - can lead to perfectly efficient innovation and utilization, even when moral hazard exists. Conversely, incomplete insurance markets in this context lead to inefficiently low levels of innovation. Moreover, optimally designed public health insurance for innovative products can solve the innovation problem by charging ex ante premia equal to consumer surplus, and ex post co-payments at or below marginal cost. When these quantities are unknown, society can usually improve static and dynamic welfare by covering the uninsured with contracts that mimic observed private insurance contracts.

download in pdf format
   (249 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (249 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11602

Users who downloaded this paper also downloaded these:
Garber, Jones, and Romer w12080 Insurance and Incentives for Medical Innovation
Lakdawalla and Sood w12681 Health Insurance as a Two-Part Pricing Contract
Cutler w13478 The Lifetime Costs and Benefits of Medical Technology
Bolin, Hedblom, Lindgren, and Lindgren w15689 Asymmetric Information and the Demand for Voluntary Health Insurance in Europe
Lakdawalla and Sood w13501 The Welfare Effects of Public Drug Insurance
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us