We analyze the design of optimal medical insurance under ex post moral hazard, i.e., when illness severity cannot be observed by insurers and policyholders decide on their health expenditures. We characterize the trade-o§ between ex ante risk sharing and ex post incentive compatibility, in an optimal revelation mechanism under hidden information and risk aversion. We establish that theoptimal contract provides partial insurance at the margin, with a deductible when insurersí rates are a§ected by a positive loading, and that it may also include an upper limit on coverage. We show that the potential to audit the health state leads to an upper limit on out-of-pocket expenses.
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