Two Approaches to Subsidizing a Given Level of Charitable Hospital Care: Welfare Implications for the Insured

Equilibria in a private market for hospital insurance with asymmetric information are modeled under two schemes for shifting costs of charitable hospital care to the insured population, one which increases hospital rates for insured patients and a second which spreads the costs across insurers according to their share of policyholders or across policyholders with an insurance tax. Combinations of these approaches are considered to find the optimal mix, ceteris paribus. It is found that a system which uses only the second approach can provide a higher level of total welfare for the insured without reducing the level of charitable care provided. This result holds under both Rothchild- Stiglitz and Miyazaki-Wilson equilibria.