The Design of Insurance Coverage for Medical Products Under Imperfect Competition

28 Pages Posted: 14 Feb 2015

See all articles by David Bardey

David Bardey

Universidad de los Andes, Colombia - Department of Economics

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Jean Marie Lozachmeur

University of Liège - Economics, Business Administration and Social Sciences

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Abstract

This paper studies the design of health insurance with ex post moral hazard, when there is imperfect competition in the market for the medical product. Various scenarios, such as monopoly pricing, price negotiation or horizontal differentiation are considered. The insurance contract specifies two types of copayments: an ad valorem coinsurance rate and a specific (per unit) copayment. By combining both copayment rates in an adequate way the insurer can effectively control the producer price, which is then set so that the producer's revenue just covers fixed costs.Consequently, a suitable regulation of the copayment instruments leads to the same reimbursement rule of individual expenditures as under perfect competition for medical products. Additional rationing of coverage because of imperfect competition as advocated by Feldstein (1973) is thus not necessary. Interestingly the optimal policy closely resembles a reference price mechanism in which copayment rates are low (possibly negative) and coinsurance rates are high.

Keywords: ex post moral hazard, health insurance contracts, copayments, imperfect competition

JEL Classification: I11, I13, I18

Suggested Citation

Bardey, David and Cremer, Helmuth and Lozachmeur, Jean Marie, The Design of Insurance Coverage for Medical Products Under Imperfect Competition. IZA Discussion Paper No. 8815, Available at SSRN: https://ssrn.com/abstract=2564948 or http://dx.doi.org/10.2139/ssrn.2564948

David Bardey (Contact Author)

Universidad de los Andes, Colombia - Department of Economics ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI) ( email )

Toulouse, 31000
France
+33 1 6112 8606 (Phone)
+33 1 6112 8637 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Jean Marie Lozachmeur

University of Liège - Economics, Business Administration and Social Sciences ( email )

Bld du Rectorat 7 Bat. B31
Liege B-4000
Belgium

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