Controlling Risk Selction Incentives when Health Insurance Contracts are Endogenous

The paper examines the nature of health insurance contracts when insurance companies are forced to pool high and low risk individuals. Insureres have an incentive to design contracts so as to attract only better brisks, and equilibrium contracts are generally characterised by less coevrage and lower cost-reducing effort on the part of the insurer than in the absence of these incentives. Public transfers positively related to claims tend to increase coverage but reduce effort, si the optimal transfer rate may be positive or negative.