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Regulating from the Demand Side: Public Health Insurance with Monopolistically Competitive Providers and Optional Spot Sales

Listed author(s):
  • Gilad Sorek
  • Randolph T. Beard

We study the implications of extending public-insurance coverage to an existing medical market in Salop’s spatial model of imperfect competition. In this setup a public insurer sets a price to medical providers, which must maintain their reservation pro.t from selling on the spot market directly to consumers. We show that the public insurer can manipulate this reservation profit by setting the coinsurance rate, and that setting the coinsurance rate properly yields the market first best product diversification. The results survive generalizations including moral hazard and incomplete coverage. When adding quality choice to the analysis, a minimum quality standard that is combined with a proper coinsurance rate can still support market efficiency.

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File URL: http://cla.auburn.edu/econwp/Archives/2016/2016-06.pdf
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Paper provided by Department of Economics, Auburn University in its series Auburn Economics Working Paper Series with number auwp2016-06.

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Date of creation: Apr 2016
Handle: RePEc:abn:wpaper:auwp2016-06
Contact details of provider: Postal:
0326 Haley Center, Auburn University, AL 36849-5049

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Web page: http://cla.auburn.edu/economics/

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  1. Lakdawalla, Darius & Sood, Neeraj, 2013. "Health insurance as a two-part pricing contract," Journal of Public Economics, Elsevier, vol. 102(C), pages 1-12.
  2. Bardey, David & Cremer, Helmuth & Lozachmeur, Jean-Marie, 2016. "The design of insurance coverage for medical products under imperfect competition," Journal of Public Economics, Elsevier, vol. 137(C), pages 28-37.
  3. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  4. 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.
  5. Nell, Martin & Richter, Andreas & Schiller, Jörg, 2009. "When prices hardly matter: Incomplete insurance contracts and markets for repair goods," European Economic Review, Elsevier, vol. 53(3), pages 343-354, April.
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