Health Insurance: Treatment vs.

In this paper, we view health insurance as a combined hedge against the two consequences of falling ill: treatment expenditures and loss in income. We discuss how an individual’s ability when healthy af-fects her decision on whether to buy health insurance with treatment to full recovery if ill or with partial treatment combined with cash compensation for the resulting loss in income. We …nd that a high-ability individual demands full recovery and is fully insured, while a low-ability individual demands partial treatment and cash compensa-tion and is only partly insured. JEL Nos.: I11, G22, D81 ¤We would like to thank Agnar Sandmo, Sören Blomquist, and participants at th