Optimal health insurance for prevention and treatment.

This paper reexamines the efficiency-based arguments for optimal health insurance, extending the classic analysis to consider optimal coverage for prevention and treatment separately. Our paper considers the tradeoff between individuals' risk reduction on the one hand, and both ex ante and ex post moral hazard on the other. We demonstrate that it is always desirable to offer at least some insurance coverage for preventive care if individual consumers ignore the impact of their preventive care on the health premium. Using a utility-based framework, we reconfirm the conventional tradeoff between risk avoidance (by risk sharing) and moral hazard for insuring treatment goods. Uncompensated losses that reduce effective income provide a new efficiency-based argument for more generous insurance coverage for prevention and treatment of health conditions. The optimal coinsurance rates for prevention and for treatment are not identical.