ABSTRACT According to a new theory advanced by Nyman (1999, 2003), an important motivation underlies demand for health insurance. However, little empirical research has attempted to quantify and explain changes in value of health insurance. By assuming demand for health insurance is derived from demand for good health, this article shows mathematically that marginal value of private health insurance can be reasonably indexed by dividing price of health insurance by a composite measure of medical prices. For period from 1960 through 2002, national data for United States suggests that marginal value of private health insurance has tended to increase over time. Based upon multiple regression analysis, marginal value is shown to have increased over time in response to rising income, more generous benefit coverage, new medical technologies, and, in recent years, backlash against health maintenance organizations (HMOs). In addition, expansions in Medicaid program are shown to have slowed growth of marginal value of private health insurance. INTRODUCTION John Nyman (1999, 2003) recently advanced a highly provocative theory indicating that many inconsistencies riddle conventional theory of demand for health insurance. He points out that people do not necessarily purchase health insurance to avoid risk as conventional theory suggests, but to a large degree, because of an underlying motivation.1 Nyman notes that health insurance coverage provides financial to medical care that some people could not otherwise afford because of their low net worth relative to costs of many medical procedures. His theory argues that an individual gives up a premium payment (and corresponding consumption of other goods and services) when healthy, to receive an income transfer from those who remain healthy when she becomes ill. For instance, one of his running examples pertains to $300,000 cost associated with receiving a liver transplant. If one person out of 75,000 people in an insurance pool requires a liver transplant per year, then for a $4 fair premium payment when healthy, insured individual potentially receives a transfer of $299,996 from 74,999 other people when ill. In Nyman's theory, value is represented by medical care expenditures that are beyond consumer's liquidity constraint. Thus, Nyman (1999) measures value of private health insurance by examining, the expected consumer surplus from health-care services that would otherwise be inaccessible (pp. 142-143). Inaccessible and unaffordable medical care services are same in Nyman's model. However, from a practical perspective, value associated with health insurance might be defined in broader terms. Consumers typically choose among alternative health plans with different amounts of insurance coverage that translate into varying amounts of access, broadly defined. For instance, some components of a health plan may marginally impede or improve to medical care. These access components include, but are not limited to, out-of-pocket payments, amount and type of health-care-provider reimbursement (fee-for-service, bonuses, capitation, etc.), waiting times, and any management strategies affecting consumer and provider choices such as preauthorization, utilization review, or existence and extensiveness of health-care-provider networks.2 Consequently, this article develops a relatively simple model to incorporate a broader measure of marginal value into demand for health insurance. The conceptual model incorporates value by treating demand for health insurance as being derived from demand for good health. From conceptual model, an index for marginal value is produced. This article then uses national data and multiple regression analysis to track and explain changes in marginal value of private health insurance over time at national level in United States. …