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When a medical intervention is found to be cost effective, what level of insurance coverage should apply to it? The optimal level of coverage may be less than or greater than full coverage of medical care costs; a finding of cost effectiveness for a service does not necessarily imply v full coverage or coverage at the same rate as other services. If there is some imperfection in the ability to translate higher insurance benefits into higher insurer revenues, the optimal level of coverage will be greater the higher the degree of moral hazard applying to the service.

Estimated coefficients for medical service production or cost functions are subject to a 'competitive amenity bias' which may result in the failure to identify factors that affect economic efficiency. Our investigation of productivity of dialysis facilities did indeed indicate both the likelihood of bias and some qualitative results. These results suggest that it will be difficult to estimate cost and that variation in the level of reimbursement will, in competitive markets, affect the level of amenity delivered to patients. Incurred cost, amenity, and patient well-being will all vary positively with the reimbursement level. Determining the 'right' level of reimbursement requires a policy decision on how much total amenity society wishes to deliver to beneficiaries of public programs.