Insurance and the Demand for Medical Care

Insurance coverage affects the use and cost of medical care, and so potentially can play a role in assuring that spending comes closer to the optimum. This article describes the implications of third party financing, whether public or private. The key issue is that—in the absence of direct user payment for services—there is an incentive for inefficient moral hazard, or excess use of services. This article uses the voluntary insurance purchasing model to frame the discussion of demand effects because that is the model used extensively in the literature. It later raises the alternative social goals model and also uses this to interpret insurance effects on demand. This discussion implies that consumers will demand the most generous insurance coverage against types of care or types of illnesses for which demand responsiveness is low, the probability of illness is low, and the cost of treatment is high.