Medical insurance, technological change, and welfare

Concerns have been expressed about the welfare effects of expensive innovations in medical care financed largely through medical insurance. This paper develops a model which considers such issues. It is shown that even if insurance is purchased optimally (subject to a plausible constraint on the form of the contract), innovations may be adopted that have the effect of reducing expected welfare. The question of how the benefits of medical innovations ought to be measured in the presence of insurance is also explored.