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Health insurance as a two-part pricing contract

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  • Lakdawalla, Darius
  • Sood, Neeraj

Abstract

Monopolies appear throughout health care. We show that health insurance operates like a conventional two-part pricing contract that allows monopolists to extract profits without inefficiently constraining quantity. When insurers are free to offer a range of insurance contracts to different consumer types, health insurance markets perfectly eliminate deadweight losses from upstream health care monopolies. Frictions limiting the sorting of different consumer types into different insurance contracts restore some of these upstream monopoly losses, which manifest as higher rates of uninsurance, rather than as restrictions in quantity utilized by insured consumers. Empirical analysis of pharmaceutical patent expiration supports the prediction that heavily insured markets experience little or no efficiency loss under monopoly, while less insured markets exhibit behavior more consistent with the standard theory of monopoly.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 102 (2013)
Issue (Month): C ()
Pages: 1-12

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Handle: RePEc:eee:pubeco:v:102:y:2013:i:c:p:1-12

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Web page: http://www.elsevier.com/locate/inca/505578

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Keywords: Market power; Health insurance;

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  15. Lakdawalla, Darius & Sood, Neeraj, 2009. "Innovation and the welfare effects of public drug insurance," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 541-548, April.
  16. Darius Lakdawalla & Tomas Philipson & Y. Richard Wang, 2006. "Intellectual Property and Marketing," NBER Working Papers 12577, National Bureau of Economic Research, Inc.
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Cited by:
  1. Darius Lakdawalla & Neeraj Sood, 2007. "The Welfare Effects of Public Drug Insurance," NBER Working Papers 13501, National Bureau of Economic Research, Inc.
  2. Lakdawalla, Darius & Sood, Neeraj, 2009. "Innovation and the welfare effects of public drug insurance," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 541-548, April.
  3. Kyna Fong & Michael Schwarz, 2009. "Towards an Efficient Mechanism for Prescription Drug Procurement," NBER Working Papers 14718, National Bureau of Economic Research, Inc.
  4. Tomas J. Philipson & George Zanjani, 2013. "Economic Analysis of Risk and Uncertainty induced by Health Shocks: A Review and Extension," NBER Working Papers 19005, National Bureau of Economic Research, Inc.
  5. Volker Grossmann, 2011. "Do Cost-sharing and Entry Deregulation Curb Pharmaceutical Innovation?," CESifo Working Paper Series 3439, CESifo Group Munich.
  6. Jay Bhattacharya & Mikko Packalen, 2008. "The Other Ex-Ante Moral Hazard in Health," NBER Working Papers 13863, National Bureau of Economic Research, Inc.
  7. Anup Malani & Tomas J. Philipson, 2011. "Can Medical Progress be Sustained? Implications of the Link Between Development and Output Markets," NBER Working Papers 17011, National Bureau of Economic Research, Inc.

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