Insurance and the Demand for Medical Care

Mark V. Pauly

in The Oxford Handbook of Health Economics

Published in print April 2011 | ISBN: 9780199238828
Published online September 2012 | | DOI:

Series: Oxford Handbooks in Economics

Insurance and the Demand for Medical Care

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  • Economics
  • Health, Education, and Welfare
  • Public Economics



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.

Keywords: insurance; medical care; moral hazard; social goals model; demand; illnesses

Article.  13422 words. 

Subjects: Economics ; Health, Education, and Welfare ; Public Economics

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