Insurance with Multiple Actors

We analyze how social-planner insurers split cost-sharing between consumers and firms (e.g. patients and doctors, or drivers and car mechanics). With no contracting frictions, firm cost-sharing can replace consumer cost-sharing other than “visit copays.” Optimal firm contracts depend on the marginal rate of substitution between consumer and firm cost-sharing. For Medicare physician services, paying physicians more up front but less as spending increases reduces risk for both patients and providers; in our calibration, net benefits are twice those from eliminating Medigap externality. For prescription drugs, a dollar of physician paperwork costs is 45–110 times more impactful than a dollar of consumer cost-sharing.