Post on 15-Jan-2016
description
Lecture 2. Compensation and responsibility
Erik Schokkaert (KULeuven, Department of Economics)
Structure
1. Responsibility and compensation in a quasi-linear model: optimal income redistribution in a first best setting
2. Another application: distribution mechanism (prospective financing mechanisms) in the health care sector
3. From first best-solutions to social orderings
1. Responsibility and compensation in a quasi-linear setting (BOSSERT en FLEURBAEY, Social Choice and Welfare, 1996)
Responsibility and compensation the responsibility cut: (ai
R, aiS)
EIER (equal income for equal R): full compensation
ETES (equal transfer for equal S): strict compensation
An impossibility and a possibility Th 1. In general, EIER and ETES are
incompatible. Th. 2. If the pre-tax income function is
additively separable in C- and S-variables,
then, there is a natural solution satisfying both EIER and ETES
How to proceed from here?
IMR WIMR ETES ETUS ETRS
GSS
WGSS
EIER X
EIUR
EIRR
Strengthening and relaxing EIER
GSS => WGSS => EIER => EIUR => EIRR
Strengthening and relaxing ETES
IMR => WIMR => ETES => ETUS => ETRS
Characterizations
IMR WIMR ETES ETUS ETRS
GSS X X X
WGSS X X X
EIER X X X
EIUR
EIRR
The egalitarian-equivalent solution
IMR WIMR ETES ETUS ETRS
GSS X X X EE
WGSS X X X
EIER X X X
EIUR
EIRR
pre-tax income she would earn with reference talent
uniform transfer to satisfy the budget contraint
The conditional-egalitarian solution
IMR WIMR ETES ETUS ETRS
GSS X X X EE
WGSS X X X
EIER X X X
EIUR
EIRR CE
responsibility part"guaranteed income"
CharacterizationsIMR WIMR ETES ETUS ETRS
GSS X X X X EE
WGSS X X X AEE
EIER X X X
EIUR X ACE
EIRR CE
average over all levels of talent
average over all levels of effortresponsibility part
2. Designing prospective financing schemes in the health care sector Incentive problems in health care - examples:
financing of hospitals or practices of doctors financing schemes for regions and sickness funds
Two "extreme" solutions: reimbursement of expenditures (e.g. fee for service) prospective financing
Trend towards prospective financing and benchmarking: advantage: incentives for cost control danger: incentives for risk selection
Solution? Risk adjustment
EXAMPLE 1: REGIONAL DISTRIBUTION MECHANISM
Central government
Citizen Regional authority
Local "health" tax?
Financial contribution
Subsidy
EXAMPLE 2: REGULATED COMPETITION WITH RISK ADJUSTMENT
Solidarity fund
Consumer Managed careorganisation
Premium Contribution
Solidaritycontribution
Premium subsidy
Basic idea
In practice: risk-adjusted premium subsidies often derived from observed expenditures
In principle: risk-adjusted premium subsidies based on “acceptable costs”: “costs generated in delivering a specified basic benefits package, containing only medically necessary and cost-effective care” (Van de Ven and Ellis, 2000)
Therefore: many factors, which do have an influence on observed expenditures, should NOT be used for calculating the risk-adjusted premium subsidies
QUESTIONS: what variables should be included in the RA-
system? how to design a prospective financing system?
Reinterpretation of the Bossert-Fleurbaey model (Schokkaert, Dhaene, Van de Voorde, HE 1998; Schokkaert and Van de Voorde, JHealth Econ 2004) health care expenditures: total amount of premium subsidies:
ω (= )
monetary gain made on a patient i:
responsibility cut:
)a(fx ii
iii x
)a,a(fx Ri
Cii
i
i
"Cost efficiency"
NEUTRALITY: for any two individuals i and j with
consequence:
it holds that
jiCj
Ci ,aa
Rj
Ri
Cj
Ci aa,aa:j,i
ji
"Solidarity"
NO INCENTIVES FOR RISK SELECTION: for any two individuals i and j with
consequence:
it holds that
jiRj
Ri ,aa
Cj
Ci
Rj
Ri aa,aa:j,i
ji
Theorems
Proposition 1. If the medical expenditure function can be written ( ) as
then the following mechanism satisfies NIRS and NEUT:
NOTE. If , then
i)a(h)a(g)a,a(f R
iCi
Ri
Ci
k
Ck
Cii )a(g
n)a(g
n
i
ix k
Rk
Cii )a(h
n)a(g
An impossibility result
Proposition 2. If the medical expenditure function is not additively separable in the variables aC and aR, then NO risk adjustment scheme can satisfy both NIRS and NEUT.
Alternative solutions? Keep NIRS, drop NEUT: egalitarian-
equivalent solutions
Keep NEUT, drop NIRS: conditional-
egalitarian solutions
Empirical illustration:
- individual data for 321,111 Belgian insured (no self-employed)
- RIZIV-reimbursements for 1995 (medicines are not included)
- per capita reimbursed health expenditures: 38.299 BEF (949 Euros)
a. treatment of omitted variables the conventional approach neglects the
effects of the R-variables in
therefore, the estimates of the effects of the C-variables are biased, if there is correlation between C- and R-variable
)a,a(fx Ri
Cii
b. non-separable specifications introduction of multiplicative effects in the
specification: age * loyalty to general practitioner medical supply * disability
no longer additively separable: conditional egalitarian approach introduces incentives for risk selection
A general remark
it is possible to neutralize the effect of responsibility variables for the computation of the premium subsidies
advisable to distinguish explicitly two stages: do the econometric work as carefully as possible
– specify the best explanatory model set up an explicit discussion about the ethical (or
political) choices
3. From first best to social orderings: Fleurbaey (2005) BASIC ASSUMPTIONS:
rejection of welfarism: subjective satisfaction is not the ultimate criterion ("responsibility for subjective happiness")
rejection of perfectionism: preferences of the population should be respected
reducing income inequalities is good, provided this has no adverse consequences on health
Some notation every individual has a particular health-
consumption bundle zi = (hi , ci ). Perfect health denoted by h*.
every individual i has well-defined monotonic preferences Ri over these bundles
how to define social preferences R over allocations z = (z1,…,zn )?
social preferences will depend on population profile of individual preferences, hence R(R)
Feasible allocations every individual i is endowed with a mapping
wi (hi ), defining her income after all taxes and transfers except health-related ones
every individual is endowed with a mapping mi (hi ), describing how much of medical expenses must be made in order to bring her to health state hi
individual budget constraint:
)h(m)()h(w)(c iiiii
iiiiiii S)h(mT)h(wc
Pareto-principle and independenceRESPECT OF INDIVIDUAL PREFERENCES
BASE SOCIAL PREFERENCES ON INDIVIDUAL PREFERENCESIN A VICINITY OF INDIVIDUALS' CURRENT SITUATION
Pigou-Dalton condition (revised)
traditional Pigou-Dalton condition makes sense only in a unidimensional world
extension to multidimensional setting may come in conflict with the Pareto condition
cares a lot abouthealth
does not care much about health
RESTRICT APPLICATION OF PIGOU-DALTON PRINCIPLETO SITUATIONS WHERE THE TWO INDIVIDUALS HAVE THESAME PREFERENCES OR ARE BOTH AT A PERFECT HEALTHLEVEL
"FULL-HEALTH EQUIVALENT INCOMES"
In normal circumstances
Relationship with WTP?
full-health equivalent consumption = actual consumption – "sacrifice" for better health
willingness-to-pay = "sacrifice" for better health + productivity gain due to better health
if productivity gain = 0, then
FHEC = Actual consumption - WTP