Indemnities versus deductibles in health insurance: Relative efficiency in deterring low-benefit medical treatments

For a given illness, it may be socially optimal to treat some, but not all patients. If the distinction between the two classes of patients is observable but not verifiable, insurers may find it impossible to simultaneously cover treatments for the high-benefit patients (Hs) and deny coverage for low-benefit patients (Ls). This dissertation models such a market and derives criteria for determining which of two devices—indemnities or deductibles—is preferable for inducing Ls to opt of treatment. In the model, two types of technological progress yield paradoxical welfare effects and counterintuitive changes in the optimal insurance contract. [1] Marginal improvements in the capacity to treat Ls can diminish welfare; Ls' prospects don't improve enough to warrant treatment, but inducing them to opt out of treatment becomes more expensive. So medical progress yields no health benefits but results in a less desirable ex post wealth distribution. [2] Technological progress that converts a marginal number of Ls to Hs can also diminish welfare. Here, technological progress may lead to improved health for some (as untreated Ls become treated Hs). However, the welfare benefits from improved health can be more than offset by the welfare costs of a less desirable wealth distribution.