Cremer, Helmuth and Lozachmeur, Jean-Marie (2025) Nonlinear reimbursement rules for preventive and curative medical care. Journal of Health Economics, vol.103.

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Abstract

This study examines nonlinear reimbursement rules for secondary preventive and therapeutic care. Individuals may be healthy or ill, with illness severity determining their ex-post type. Preventive care is chosen beforehand, while curative care is decided after health status is known. In an ideal scenario where health status is observable, optimal insurance provides lump-sum payments unrelated to expenditures. However, when severity is unobservable (causing ex post moral hazard), this approach is not incentive-compatible. Instead, optimal insurance designs benefits that increase with both preventive and curative care, as higher expenditures reduce informational rents and align incentives. Preventive care, though chosen before illness occurs, affects incentive constraints due to two factors: (1) it is more effective for severely ill individuals, and (2) they have lower marginal utility of income, meaning preventive expenditures impact them less. These effects shape the optimal reimbursement structure. Additionally, when individuals misperceive preventive care benefits, the main results hold, but an extra corrective (Pigouvian) term appears in the reimbursement formula to adjust for this misperception.