Consumer Choice and Selective Contracting in Hospital-Insurer Bargaining
Posted: 20 Jun 2007
Abstract
We hospital-insurer bargaining for an insurance market with two types of consumers which differ in their willingness to pay for hospital access. We use a three stage game in which (1) insurers contract a network of hospitals, (2) insurers set premiums, and (3) consumers choose the insurance policy with their preferred combination of premium level and network size. Insurers offer a menu of two policies: (1) cheap policies with an HMO-style restricted network, and (2) expensive policies with a PPO-style broad network.
We examine three outcomes: (1) a pooling equilibrium in which both types of consumers have unrestricted access, (2) a separating equilibrium in which the high-type consumers choose a broad network and the low-type consumers choose a restricted network, and (3) an uncovered equilibrium in which the low-type consumers become uninsured and the high-type consumers have unrestricted access. Furthermore, the cost of contracting a hospital network can be either increasing (because of capacity constraints or cost differences between hospitals) or decreasing (because of increasing insurer bargaining power) in network size. We compute premium levels and network sizes for all three outcomes and for both types of network contracting costs.
For increasing network costs, we find a separating equilibrium as long as the fraction of high-type consumers is lower than the ratio of their willingness to pay. Beyond this point, either the low-types become uninsured or, with mandatory health insurance, a pooling equilibrium materializes. For decreasing network costs, we find that if the fraction of high-types is small, a pooling equilibrium emerges. Beyond this point, the low-types become uninsured. The separating equilibrium can only exist for a small range of the fraction of high-type consumers, and only if health insurance is mandatory.
Keywords: selective contracting, hospitals, insurers, bargaining, averse selection
JEL Classification: I11, L15, C7
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