Paul Gertler University of California at Berkeley and NBER Orville Solon University of the Philippines, School of Economics
March 1, 2002
Abstract A major policy issue in developing countries is the lack of formal insurance markets. A popular approach to this problem is compulsory social health insurance (SI). The movement towards SI has been motivated not only by the desire to expand insurance coverage, but also by fiscal pressure to shift the burden of delivering and financing health care from the public sector to the private. In this paper we show that SI fails to expand insurance coverage or shift the burden to the private sector because providers capture SI benefits as rent by raising price-cost margins to insured patients. As a result the out-of-pocket costs to the insured patient are the same as to the uninsured. Our empirical results from the Philippines indicate that hospitals extract 86 percent of SI benefits through price discrimination. We also show that expanding SI actually increased the burden on the public sector rather than relieving it. Keywords: Social Insurance, Health Insurance, and Price Discrimination. J.E.L. classification numbers: H51, I11, and O12. Corresponding address: Paul Gertler, Haas School of Business, University of California, Berkeley California, 94720 or firstname.lastname@example.org Acknowledgements: We are indebted to Micheal Ash, Rui de Figueiredo, William Evans, Ben Hermalin, Maitreesh Ghatak, Garrick Blalock, Jeff, Hammer, Alex Herrin, and Jonathan Morduch provided helpful comments and to Stella Alabastro, Alice Ferrer and Carlos Tan who provided excellent research assistance. The authors gratefully acknowledge financial support from grants from the International Health Policy Program and the U.S. National Institute of Aging. The usual disclaimer applies.
1. INTRODUCTION A major policy issue in developing countries is the lack of formal health insurance markets1. A popular approach to this problem is a form of mandated social insurance (SI) that finances medical care through compulsory payroll taxes and allows beneficiaries to purchase medical care from both private and public providers. However, the movement towards this form of SI has been motivated not only out of the desire to expand insurance coverage, but also to reduce financial pressure on public budgets (Gertler, 1998). SI is seen as a way to shift a portion of the public burden of delivering and financing health care to the private sector. SI reduces the out-
of-pocket price of higher quality private care relative to lower quality public care at the time of purchase, thereby providing an incentive to choose the private sector over the public. In this paper, we show that serious flaws in the designs chosen by many SI plans significantly reduce their insurance value and fail to shift the burden from the public to the private sector. The flawed design allows providers to capture the SI benefits as rent by raising price-cost margins to insured patients. As a result, out-of-pocket payments at the time of illness for the insured are the same as for the uninsured, implying that SI does not provide an incentive to choose the private sector over the public. Hence, SI fails to expand insurance coverage or shift the burden to the private sector. These results are important because many countries have adopted this design, and there are political-economy reasons to believe that countries considering SI may also adopt this design. The identification of the rent extraction, however, is not straightforward. We use a twopart tariff model to derive optimal price discrimination strategies. We show that if hospitals have market power, they will not only extract all SI benefits through price discrimination, but also use health insurance status as information about patient type so as to exploit differences in insured and uninsured patients’ price elasticities of...