Abstract This paper outlines a feasible employee premium contribution policy, which would reduce the inefficiency associated with adverse selection when a limited coverage insurance policy is offered alongside a more generous policy. The ''efficient premium contribution'' is defined and is shown to lead to an efficient allocation across plans of persons who differ by risk, but it may also redistribute against higher risks. A simulation of the additional Ž . option of a catastrophic health plan CHP accompanied by a medical savings account Ž . MSA is presented. The efficiency gains from adding the MSArcatastrophic health Ž . insurance plan CHP option are positive but small, and the adverse consequences for high risks under an efficient employee premium are also small.
