Competition Among Insurers and Consumer Welfare

This article presents a model to analyze consumer welfare, price, and competition in a three-way market among consumers, medical providers, and insurers. While insurers compete with each other for customers, they also act as collective bargaining agents on behalf of consumers in determining the equilibrium price of health care with providers. The entry of an additional insurer thus has contradictory effects on welfare, reducing premiums through competition but increasing price through reduced bargaining power of incumbent insurers. Moreover, the more favorable contracts allow consumers to purchase care more often, shifting out the demand curve for care and increasing price.