Abstract

This paper analyzes the welfare effect from government sponsored insurance under two policy regimes for reimbursement levels – the first under which policy makers commit to a specific reimbursement schedule, the second which allows discretion in setting reimbursement schedules. We find that prices and quality will differ depending on which policy regimen is followed. We are able to identify a level for the policy maker’s elasticity of utility with respect to its policy tool under which government insured patients are unambiguously better off with policy commitment. The ordering of welfare is reversed if the elasticity of utility is reversed. In either case, privately insured patients may be better or worse off.