Healt insuranse: treatment vs. Compensation
In this paper we study how differences in ability can explain individuals’ choice between health insurance contracts offering indemnity in the form of medical treatment and /or cash compensation of income loss. Ability is a measure of the individuals’ human capital and depends on their state of health. Individuals with a high ability are shown to purchase more extensive insurance coverage than individuals with a low ability. Furthermore, high-ability individuals prefer an insurance contract entitling them to complete medical treatment if they fall ill, while low-ability individuals prefer a contract offering indemnity partly as medical treatment and partly as cash compensation. We show that in an unregulated competitive insurance market low-ability individuals will insure only partially, thus suffering a lower level of utility if ill, while high-ability individuals will insure fully.
Emblem, A.W, G. Asheim and T. Nilssen