This chapter describes how economic theory (and experience) of the demand for insurance predicts that risk-averse individuals purchase coverage if available at so-called fair premiums, which amount to no more than the expected value of the loss to be covered. In the case of health, additional fi nancial means (provided by coverage) may be even more important when a person is ill than when he or she is healthy. If so, demand for health insurance, even in
low-income countries, could be high.
Every insurer needs to charge a “loading” for administrative expense, compensation for risk, and profi t (in the case of a public insurer, the loading amounts
to the effi ciency loss caused by taxation needed to finance the insurer’s operations). Therefore, the behavior of health insurance suppliers becomes of crucial importance. The loading contained in their premiums (or contributions) is just one of several supply dimensions, which include comprehensiveness of benefits, amount of risk selection effort, degree of vertical integration with health
services providers, and degree of seller concentration in the market. This chapter addresses these dimensions of supply and the powerful effect on them of moral hazard (the tendency of consumers to underinvest in prevention, choose
the most intensive treatment alternative, and push for application of the latest medical technology). In the presence of marked moral hazard effects, health
insurers are well advised to include only a few items in their benefi t list, because each of these items tends to increase in price, quantity, and hence expenditure. Moreover, premium regulation induces risk selection efforts. If allowed to charge contributions according to true risk, health insurers will set premiums such that
high and low risks yield the same contribution margin on expectation. In that event, risk selection (“cream skimming”) is not worthwhile. These phenomena hold not only for private health insurance in low-income countries but also for community-based and public health insurance.
Because little empirical data on the supply of health insurance exist, case studies, mainly of low-income countries, are used to illustrate theoretical predictions.
On the whole, the limited empirical evidence suggests that the theory developed in this chapter may be suffi ciently descriptive to provide some guidelines for policy.