Health care markets fail to satisfy many requirements for perfect competition, including large numbers of consumers and firms, zero search costs, and marketability of all goods and services. Over time, health care markets have evolved to overcome the resulting inefficiencies. We combine the theory of agency with a model of monopolistic competition to explore three regimes of health care organization that were dominant at different points in time: (1) independent physicians and cost-based reimbursement for hospitals; (2) regulation; and (3) managed care. Each regime represents, for its time, a sensible response to market failure. Each regime has predictable consequences for prices, costs, and quality. We examine the theoretical arguments and review the empirical evidence about each regime. A consistent message emerges: Providers respond to economic incentives in a manner consistent with theory.
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ReDIF This chapter was published in: A. J. Culyer & J. P. Newhouse (ed.) Handbook of Health Economics, , chapter 20, pages 1093-1139, 2000.
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This chapter was published in the following book, which is listed on IDEAS: A. J. Culyer & J. P. Newhouse (ed.), 2000.
"Handbook of Health Economics,"
Handbook of Health Economics,
Elsevier,
edition 1, volume 1, number 1, September.
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