Moderated Web Discussion on Demand for Health Insurance

AcademyHealth's Health Economics Interest Group is sponsoring an interactive Web forum with John A. Nyman to discuss his book, The Theory of Demand for Health Insurance (Stanford, CA: Stanford University Press, 2003). This ongoing discussion will be held weekdays from July 10 through July 21, during which Dr. Nyman will field questions and respond to comments regarding his theory and book. He will also consider the implications of the theory for a specific current policy proposal: consumer-directed health care and health savings accounts. All are welcome to participate in or observe the discussion.

The discussion will take place on the Health Economics Interest Group Forum page. If you haven't already, register as a User so you can participate in the discussion by adding your opinion or asking additional questions.

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Conventional theory holds that consumers purchase health insurance because they prefer certain losses (paying the premium) to uncertain ones (medical bills) of the same expected magnitude. It also holds that the reduction in the price of medical care that consumers face because of insurance causes an increase in health care purchases (moral hazard), and that the purchase of this additional health care is welfare decreasing (the moral hazard welfare loss). As a result of this theory, the value of health insurance is calculated to be negative, and coinsurance rates of 67 percent have been suggested as a policy to reduce the welfare loss from health insurance (M. Feldstein, 1973).

Dr. Nyman suggests that consumers purchase insurance in order to obtain a transfer of income when they become ill. He also suggests that a large portion of the additional health care purchased when insured is a response to this income transfer, and therefore welfare increasing. Indeed, because it often allows access to health care that would otherwise be unaffordable, it is very valuable.  Based on this theory, health insurance
is welfare-increasing.

The theory further suggests that coinsurance rates should only be applied to certain medical procedures, and that the additional access generated by health insurance represents an external benefit that justifies government intervention in this market.  Finally, the theory suggests that policy directed at reducing health care prices may be more effective in reducing costs than one directed at reducing the quantity of health care consumed.

Consumer-directed health care and health savings accounts are relatively new policy tools that advocates hope and will encourage consumers to become more price conscious. Opposers believe they are merely a cost shift to individuals. This new model is an excellent application of Nyman's challenge to incentive theory and provides basis for understanding why people purchase insurance.