Working Paper: CEPR ID: DP9420
Authors: Jan Boone
Abstract: Consumers, when buying health insurance, do not know the exact value of each treatment that they buy coverage for. This leads them to overvalue some treatments and undervalue others. We show that the insurance market cannot correct these mistakes. This causes research labs to overinvest in treatments that hardly add value compared to current best practice. The government can stimulate R&D in breakthrough treatments by excluding treatments with low value added from health insurance coverage. If the country is rich enough such a government intervention in a private health insurance market raises welfare.
Keywords: cost effectiveness analysis; health insurance; pharmaceutical research and development
JEL Codes: D4; I13; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumer Misperception of Treatment Value (D46) | R&D Investment in Breakthrough Treatments (O32) |
| R&D Investment in Breakthrough Treatments (O32) | Dynamic Efficiency (D61) |
| Government Intervention (L59) | R&D Incentives (O32) |
| Exclusion of Low-Value Treatments from Coverage (I13) | R&D Incentives (O32) |
| Government Intervention (L59) | Total Welfare (D69) |
| Exclusion of Low-Value Treatments from Coverage (I13) | Total Welfare (D69) |
| Consumer Misperceptions (D18) | Exclusion of Low-Value Treatments from Coverage (I13) |