Optimal health insurance
Charles E. Phelps
Abstract
Abstract I formulate expected‐utility‐maximizing models for health insurance with a single optimal coinsurance ( C* ) and (separately) a single optimal deductible ( D*) . While so‐doing, I formalize Nyman's challenge to standard welfare‐loss models, clarifying when and by how much this alters unadjusted models. Using MEPS‐calibrated lognormal distributions and incorporating skewness and kurtosis measures of financial risk, I show how C* shifts as various economic parameters change. For reasonable parameter values, C* < 0.1, much lower than variance‐only estimates would conclude. Omitting higher‐order risk parameters importantly understates risk and hence understates optimal insurance coverage. I separately develop methods to determine D* , showing that it is approximately a fixed percentage of income that falls as the distribution of financial risks rise. This finding contrasts with existing US public policy regarding high‐deductible health plans, which employ fixed deductibles, independent of income.