“Selling the store” to the HMO: A life insurance contract for optimal provision of care

Abstract

Health care is a credence good: consumers must consult an expert who diagnoses and repairs a problem. Since effort is difficult to monitor, fraud or low effort are possible. This paper proposes “selling the store” to an HMO via a life insurance contract. The HMO becomes a residual claimant, avoiding payment as long as the patient is alive. This contract forces the HMO to provide a specified level of care, even when a patient does not know his initial level of health. This contract solves several problems associated with fraudulent diagnosis and low effort, but is not a panacea.