Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

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

Bodil O. Hansen and Hans keiding
Additional contact information
Bodil O. Hansen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Hans keiding: University of Copenhagen, Postal: University of Copenhagen, Institute of Public Health Research,, Blegdamsvej 5,, DK-2200 Copenhagen K.

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

JEL-codes: I10; I19; I30

13 pages, November 1, 1999

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