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Insurance, Consumer Choice, and the Equilibrium Price and Quality of Hospital Care

  • Katz Michael L

    ()

    (University of California, Berkeley)

I analyze price and quality competition in a model that captures important institutional features of U.S. hospital markets. I first consider duopoly hospitals serving a population of patients who are covered by insurance that their employers purchase from duopoly health plans. I show that second-best quality levels can be sustained as equilibrium outcomes under both indemnity insurance and managed care even when patients are fully insured. I also demonstrate that a monopoly hospital system can yield efficient quality levels and that prices may be lower under monopoly than duopoly even when there are no technical efficiencies associated with monopoly. The latter result arises when employers and health insurance plans view the hospitals as complements even though any given consumer views them as substitutes.

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File URL: http://www.degruyter.com/view/j/bejeap.2011.11.2/bejeap.2011.11.2.2661/bejeap.2011.11.2.2661.xml?format=INT
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Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 11 (2011)
Issue (Month): 2 (January)
Pages: 1-44

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Handle: RePEc:bpj:bejeap:v:11:y:2011:i:2:n:5
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  1. Martin Gaynor & Rodrigo Moreno-Serra & Carol Propper, 2010. "Death by Market Power: Reform, Competition and Patient Outcomes in the National Health Service," NBER Working Papers 16164, National Bureau of Economic Research, Inc.
  2. John Thanassoulis, 2006. "Competitive Mixed Bundling and Consumer Surplus," Economics Series Working Papers 263, University of Oxford, Department of Economics.
  3. Keeler, Emmett B. & Melnick, Glenn & Zwanziger, Jack, 1999. "The changing effects of competition on non-profit and for-profit hospital pricing behavior," Journal of Health Economics, Elsevier, vol. 18(1), pages 69-86, January.
  4. Neven, Damien, 1985. "Two Stage (Perfect) Equilibrium in Hotelling's Model," Journal of Industrial Economics, Wiley Blackwell, vol. 33(3), pages 317-25, March.
  5. Melnick, Glenn & Keeler, Emmett, 2007. "The effects of multi-hospital systems on hospital prices," Journal of Health Economics, Elsevier, vol. 26(2), pages 400-413, March.
  6. Pauly, Mark V, 1987. "Nonprofit Firms in Medical Markets," American Economic Review, American Economic Association, vol. 77(2), pages 257-62, May.
  7. Esther Gal-Or, 1997. "Exclusionary Equilibria in Health-Care Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 5-43, 03.
  8. Thomas P. Lyon, 1999. "Quality Competition, Insurance, and Consumer Choice in Health Care Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(4), pages 546-580, December.
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