Controlling selection incentives when health insurance contracts are endogenous

The paper examines the nature of health insurance contracts when insurance companies pool high- and low-risk individuals. In a spatial product differe ntiation model, the normal forces of competition induce quality provision, but selection incentives induce insurers to under-provide quality. To offse t selection incentives, the government can reimburse some of the insurers' costs. However, such a subsidy can in some cases reduce quality further, as well as discourage production efficiency. In such cases the optimal reimbu rsement rate is negative. (C) 2001 Elsevier Science B.V. All rights reserve d.