The income transfer effect, the access value of insurance and the Rand health insurance experiment.

Åke Blomqvist (2001) raises the issue of relevance in his review of my two papers (Nyman, 1999a,b). He agrees that because of the skewed distribution in health expenditures (which concentrates most of income transfers from health insurance in the hands of those few who become ill), income transfers explain a large portion of the additional consumption due to becoming insured. Nevertheless, he argues that income transfer effects are largely irrelevant in explaining the marginal health expenditure differences between different health plans because of the stop-loss provisions typically incorporated into them. For example, in the Rand health insurance experiment (HIE) the stop-loss provision in the 95% coinsurance plan converted this plan into a 0% coinsurance plan as soon as US$ 1000 in out-of-pocket spending was generated. This reduces the difference between the income transfers in the 95%/0% plan and the transfers in the 0% plan. If income transfer differences between the two insurance plans are small, then the portion of the difference in spending that can be explained by income transfers — the income transfer effect — is also small. Blomqvist uses the Slutsky approximation to make his point, but with the detailed information from the Rand experiment, his point can be made more directly using: