Evaluating health insurance: A review of the theoretical foundations

Over the last 50 years, the theoretical basis of the value of health insurance has transformed itself from one based primarily on a gain from risk avoidance and a welfare loss from the additional medical care purchased by those who are insured, to one based primarily on the welfare gain from the additional medical care purchased by those who are insured. This transformation reflects (1) an increasing realization of the importance of health care in the demand for insurance, and (2) an increasing recognition that insurance, even insurance that pays off by paying for care, acts to transfer income from the healthy to the ill. This article traces the development of the theory of the value of health insurance using the above two themes as the basis for its organization.