1 / 44

Lecture 2. Compensation and responsibility

Lecture 2. Compensation and responsibility. Erik Schokkaert (KULeuven, Department of Economics). Structure. Responsibility and compensation in a quasi-linear model: optimal income redistribution in a first best setting

orsin
Download Presentation

Lecture 2. Compensation and responsibility

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Lecture 2. Compensation and responsibility Erik Schokkaert (KULeuven, Department of Economics)

  2. Structure • Responsibility and compensation in a quasi-linear model: optimal income redistribution in a first best setting • Another application: distribution mechanism (prospective financing mechanisms) in the health care sector • From first best-solutions to social orderings

  3. 1. Responsibility and compensation in a quasi-linear setting(BOSSERT en FLEURBAEY, Social Choice and Welfare, 1996)

  4. Responsibility and compensation • the responsibility cut: (aiR, aiS) • EIER (equal income for equal R): full compensation • ETES (equal transfer for equal S): strict compensation

  5. 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

  6. How to proceed from here?

  7. Strengthening and relaxing EIER

  8. GSS => WGSS => EIER => EIUR => EIRR

  9. Strengthening and relaxing ETES

  10. IMR => WIMR => ETES => ETUS => ETRS

  11. Characterizations

  12. The egalitarian-equivalent solution pre-tax income she would earn with reference talent uniform transfer to satisfy the budget contraint

  13. The conditional-egalitarian solution "guaranteed income" responsibility part

  14. Characterizations average over all levels of talent average over all levels of effort responsibility part

  15. 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

  16. Central government Financial contribution Subsidy Regional authority Citizen Local "health" tax? EXAMPLE 1: REGIONAL DISTRIBUTION MECHANISM

  17. Solidarity fund Solidarity contribution Premium subsidy Managed care organisation Consumer Premium Contribution EXAMPLE 2: REGULATED COMPETITION WITH RISK ADJUSTMENT

  18. 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

  19. QUESTIONS: • what variables should be included in the RA-system? • how to design a prospective financing system?

  20. 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:

  21. "Cost efficiency" • NEUTRALITY: for any two individuals i and j with • consequence: it holds that

  22. "Solidarity" • NO INCENTIVES FOR RISK SELECTION: for any two individuals i and j with • consequence: it holds that

  23. Theorems • Proposition 1.If the medical expenditure function can be written ( )as then the following mechanism satisfies NIRS and NEUT: NOTE. If , then

  24. 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.

  25. Alternative solutions? • Keep NIRS, drop NEUT: egalitarian-equivalent solutions

  26. Keep NEUT, drop NIRS: conditional-egalitarian solutions

  27. 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)

  28. 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

  29. 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

  30. 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

  31. 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

  32. 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) Some notation

  33. 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:

  34. Pareto-principle and independence RESPECT OF INDIVIDUAL PREFERENCES BASE SOCIAL PREFERENCES ON INDIVIDUAL PREFERENCESIN A VICINITY OF INDIVIDUALS' CURRENT SITUATION

  35. 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 does not care much about health cares a lot about health

  36. RESTRICT APPLICATION OF PIGOU-DALTON PRINCIPLE TO SITUATIONS WHERE THE TWO INDIVIDUALS HAVE THESAME PREFERENCES OR ARE BOTH AT A PERFECT HEALTH LEVEL

  37. "FULL-HEALTH EQUIVALENT INCOMES" In normal circumstances

  38. 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

More Related