An alternative framework for evaluating welfare losses in the health care market

A recurring theme in the health economics literature is that 'excess' health insurance reduces society's welfare. This proposition is considered to be a truism by most health economists. Feldman and Morrisey (1990) report that two-thirds of American and Canadian health economists surveyed agree with the statement that, 'the level and type of health insurance held by most U.S. families generate substantial welfare loss due to over-consumption of medical services'. Consequently, most research in the area has attempted to identify the exact dollar value of this welfare loss. In this note, I will try to show that the traditional method of calculating welfare losses from excess health insurance is severely flawed because it is based on assumptions about consumer behavior that are not supported by the available empirical evidence. Furthermore, the methodology masks other, potentially greater societal welfare losses that are likely to exist in the health care sector, and blinds us from seeking the most effective public policy remedies. This note suggests an alternative framework for considering welfare losses based on researchers' evaluations of medical necessity.