A. True/False Explain. Indicate whether each of the following statements is true

Question

A. True/False Explain. Indicate whether each of the following statements is true or false and then explain why you think this. Include in your explanation any pertinent institutional details and economic reasoning (including appropriate graphs and equations). Please provide concise, clear answers with minimal irrelevant detail. Explanation is required.

In consumer-directed health insurance plans it is possible to have low levels of deadweight loss from moral hazard, while also having low coinsurance rates and no supply-side restrictions.

Explanation / Answer

No, it is not possible to have low levels of deadweight loss from moral hazard, while also having low coinsurance rates and no supply-side restrictions. Results suggest that on average, the deadweight losses from moral hazard far outweigh the welfare gains from risk protection in the existing plans. An important contribution of my approach over the existing literature is that I can estimate the tradeoff separately for each agent in my data. The ability to calculate welfare separately for each agent allows me to move beyond average welfare to make statements about the distribution of welfare and welfare for agents with specific observable characteristics. The results suggest that there is considerable variation in the net welfare gain from insurance across agents. Ranked by valuation, the top 1% of agents have a net gain from insurance that is 100 times smaller than the loss for agents at the mean, and the bottom 1% of agents have a net loss from insurance that is ten times larger than the loss for the individuals at the mean. I also find considerable variation in the net welfare gain by observable characteristics.

When I consider counterfactual plans with linear cost sharing structures so that I can summarize generosity with a single partial insurance rate between zero and one, or a single deductible from $0 to $20,000, I find that deadweight losses always increase faster than risk protection as generosity increases. This result suggests that the conventional wisdom that some level of partial insurance will achieve the optimal balance between the deadweight loss from moral hazard and the welfare gains from risk protection is misguided. As generosity increases, if the deadweight loss always grows faster than the welfare gain from risk protection, zero insurance will be optimal. Conversely, if if the gain from risk protection always grows faster than the deadweight loss, full insurance will be optimal. Partial insurance will only be optimal in cases where the marginal welfare gains and welfare losses are equal as generosity increases. The deadweight loss vannot be resolved with any policy changes that are likely be considered. A completely free market for health care and health insurance is never going to be allowed in the United States. Deadweight loss will accompany any third-party financing mechanism that involves taxes or a single source of health insurance. Here  deadweight loss calculation is based on Hicksian demand instead of Marshallian demand. This differs from the deadweight loss calculation of Feldstein and Gruber (1995), who use Marshallian demand for simplicity.The price change from no insurance to plan X (supposed
) induces a price effect that consists of a substitution effect and an income effect, and our calculation of deadweight loss excludes the income effect.

A nonzero price elasticity of expenditure on medical care induces a deadweight loss when consumers do not face the full marginal cost of their care and other consumers pay the remainder through their insurance premiums. The deadweight loss is greatest in the more generous plans.

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