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Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second-Best in Health Care Markets

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  • Martin Gaynor
  • Deborah Haas-Wilson
  • William B. Vogt

Abstract

The nature and normative properties of competition in health care markets have long been the subject of much debate. In this paper we consider what the optimal benchmark is in the presence of moral hazard effects on consumption due to health insurance. Intuitively, it seems that imperfect competition in the health care market may constrain this moral hazard by increasing prices. We show that this intuition cannot be correct if insurance markets are competitive. A competitive insurance market will always produce a contract that leaves consumers at least as well off under lower prices as under higher prices.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 108 (2000)
Issue (Month): 5 (October)
Pages: 992-1005

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Handle: RePEc:ucp:jpolec:v:108:y:2000:i:5:p:992-1005

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References

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  1. Martin Gaynor & Deborah Haas-Wilson, 1998. "Change, Consolidation, and Competition in Health Care Markets," NBER Working Papers 6701, National Bureau of Economic Research, Inc.
  2. A. Mitchell Polinsky & William P. Rogerson, 1982. "Products Liability, Consumer Misperceptions, and Market Power," NBER Working Papers 0937, National Bureau of Economic Research, Inc.
  3. Ching-To Albert Ma & Michael H. Riordan, 2002. "Health Insurance, Moral Hazard, and Managed Care," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(1), pages 81-107, 03.
  4. Feldstein, Martin S, 1973. "The Welfare Loss of Excess Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 251-80, Part I, M.
  5. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  6. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 44-62, February.
  7. Carl Shapiro, 1982. "Consumer Information, Product Quality, and Seller Reputation," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 20-35, Spring.
  8. Robinson, James C. & Luft, Harold S., 1985. "The impact of hospital market structure on patient volume, average length of stay, and the cost of care," Journal of Health Economics, Elsevier, vol. 4(4), pages 333-356, December.
  9. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-77, March.
  10. Frech, H E, III, 1979. "Market Power in Health Insurance, Effects on Insurance and Medical Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 28(1), pages 55-72, September.
  11. Feldman, Roger & Dowd, Bryan, 1991. "A New Estimate of the Welfare Loss of Excess Health Insurance," American Economic Review, American Economic Association, vol. 81(1), pages 297-301, March.
  12. Ma, Ching-to Albert & McGuire, Thomas G, 1997. "Optimal Health Insurance and Provider Payment," American Economic Review, American Economic Association, vol. 87(4), pages 685-704, September.
  13. Richard Arnott & Joseph Stiglitz, 1991. "Equilibrium in Competitive Insurance Markets with Moral Hazard," NBER Working Papers 3588, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Vaithianathan, Rhema, 2006. "Health insurance and imperfect competition in the health care market," Journal of Health Economics, Elsevier, vol. 25(6), pages 1193-1202, November.
  2. Martin Gaynor & Deborah Haas-Wilson, 1998. "Change, Consolidation, and Competition in Health Care Markets," HEW 9809001, EconWPA.
  3. Donald J Wright, 2004. "Insurance and monopoly power in a mixed private/public hospital system, CHERE Discussion Paper No 55," Discussion Papers 55, CHERE, University of Technology, Sydney.
  4. Parry, Ian, 2001. "On the Efficiency of Public and Private Health Care Systems: An Application to Alternative Health Policies in the United Kingdom," Discussion Papers dp-01-07, Resources For the Future.
  5. Wigger, Berthold U. & Anlauf, Markus, 2002. "Moral Hazard, Market Power, and Second Best Health Insurance," CSLE Discussion Paper Series 2002-06, Saarland University, CSLE - Center for the Study of Law and Economics.
  6. Parry, Ian W.H., 2005. "Comparing the welfare effects of public and private health care subsidies in the United Kingdom," Journal of Health Economics, Elsevier, vol. 24(6), pages 1191-1209, November.
  7. Ernst R. Berndt & Thomas McGuire & Joseph P. Newhouse, 2011. "A Primer on the Economics of Prescription Pharmaceutical Pricing in Health Insurance Markets," Forum for Health Economics & Policy, De Gruyter, vol. 14(2), pages 10.
  8. Nell, Martin, 2001. "Managed Claims: Zur Notwendigkeit einer vertikalen Integration von Versicherungs- und Reparaturleistungen," Working Papers on Risk and Insurance 2, University of Hamburg, Institute for Risk and Insurance.
  9. Nell, Martin & Richter, Andreas & Schiller, Jörg, 2005. "When prices hardly matter: Incomplete insurance contracts and markets for repair goods," Working Papers on Risk and Insurance 14, University of Hamburg, Institute for Risk and Insurance.
  10. Alan M. Garber & Charles I. Jones & Paul Romer, 2006. "Insurance and Incentives for Medical Innovation," Forum for Health Economics & Policy, De Gruyter, vol. 0, pages 4.
  11. Robin Boadway & Manuel Leite-Monteiro & Maurice Marchand & Pierre Pestieau, 2002. "Social Insurance and Redistribution," Working Papers 1004, Queen's University, Department of Economics.
  12. Lukas, Daniel, 2009. "Efficiency effects of cross-border medical demand," Dresden Discussion Paper Series in Economics 15/09, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  13. Darius Lakdawalla & Neeraj Sood, 2005. "Insurance and Innovation in Health Care Markets," NBER Working Papers 11602, National Bureau of Economic Research, Inc.
  14. Martin Nell & Andreas Richter & Jörg Schiller, 2005. "When prices hardly matter: Incomplete insurance contracts and markets for repair goods," Risk and Insurance 0501002, EconWPA.
  15. Mattoo, Aaditya & Rathindran, Randeep, 2005. "Does health insurance impede trade inhealth care services?," Policy Research Working Paper Series 3667, The World Bank.
  16. Darius Lakdawalla & Neeraj Sood, 2006. "Health Insurance as a Two-Part Pricing Contract," NBER Working Papers 12681, National Bureau of Economic Research, Inc.

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