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Department of Economics, Copenhagen Business School Working Paper Series, Department of Economics, Copenhagen Business School

No 03-2000:
Reimbursement of Medicine Outlays – An Optimal Insurance Approach

Bodil O. Hansen and Hans keiding

Abstract: In this paper, the reimbursement of spending on medicin is considered as

a problem of insurance, where the loss due to illness of the insured is covered

totally or partially by an insurance company (which may be the government).

The presence of moral hazard (in the form of the individual patient’s own

effort to reduce cost by avoiding unnecessary medicination and choosing the

cheapest drugs) implies that an optimal insurance will have less than total

coverage of the patient outlays.

The insurance approach to drug subsidization indicates that reimburse-ment

should vary with the type of medicin rather than with accumulated pa-tient

outlays. Also, secondary investment covering the remaining part of the

patient’s outlays, a feature of the reimbursement system in some countries, is

suboptimal.

Keywords: insurance companies; health care; (follow links to similar papers)

JEL-Codes: I10; I19; I30; (follow links to similar papers)

13 pages, November 1, 1999

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