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Minimum Coverage Regulation in Insurance Markets

  • Daniel McFadden
  • Carlos Noton
  • Pau Olivella


We study the consequences of imposing a minimum coverage in an insurance market where enrollment is mandatory and agents have private information on their true risk type. If the regulation is not too stringent, the equilibrium is separating in which a single firm monopolizes the high risks while the rest attract the low risks, all at positive profits. Hence individuals, regardless of their type, "subsidize" insurers. If the legislation is sufficiently stringent the equilibrium is pooling, all firms just break even and low risks subsidize high risks. None of these results require resorting to non-Nash equilibrium notions.

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Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 301.

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Date of creation: 2013
Date of revision:
Handle: RePEc:edj:ceauch:301
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  1. Daniel McFadden & Carlos Noton & Pau Olivella, . "Remedies for Sick Insurance," Working Papers 620, Barcelona Graduate School of Economics.
  2. Mark Pauly, 2012. "Wussinomics: the state of competitive efficiency in private health insurance," International Journal of Health Care Finance and Economics, Springer, vol. 12(3), pages 235-245, September.
  3. Michael Smart, 1996. "Competitive Insurance Markets with Two Unobservables," Working Papers msmart-96-01, University of Toronto, Department of Economics.
  4. Mahar, Stephen & Bretthauer, Kurt M. & Salzarulo, Peter A., 2011. "Locating specialized service capacity in a multi-hospital network," European Journal of Operational Research, Elsevier, vol. 212(3), pages 596-605, August.
  5. Francesco Decarolis, 2015. "Medicare Part D: Are Insurers Gaming the Low Income Subsidy Design?," American Economic Review, American Economic Association, vol. 105(4), pages 1547-80, April.
  6. M. Kate Bundorf & Jonathan Levin & Neale Mahoney, 2012. "Pricing and Welfare in Health Plan Choice," American Economic Review, American Economic Association, vol. 102(7), pages 3214-48, December.
  7. William E. Encinosa & David E. M. Sappington, 1997. "Competition among Health Maintenance Organizations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 129-150, 03.
  8. Jack, William, 2006. "Optimal risk adjustment with adverse selection and spatial competition," Journal of Health Economics, Elsevier, vol. 25(5), pages 908-926, September.
  9. Olivella, Pau & Vera-Hernandez, Marcos, 2007. "Competition among differentiated health plans under adverse selection," Journal of Health Economics, Elsevier, vol. 26(2), pages 233-250, March.
  10. repec:adr:anecst:y:2003:i:69:p:06 is not listed on IDEAS
  11. Vikram Tiwari & H. Heese, 2009. "Specialization and competition in healthcare delivery networks," Health Care Management Science, Springer, vol. 12(3), pages 306-324, September.
  12. Neudeck, Werner & Podczeck, Konrad, 1996. "Adverse selection and regulation in health insurance markets," Journal of Health Economics, Elsevier, vol. 15(4), pages 387-408, August.
  13. Pau Olivella & Marcos Vera-Hernandez, 2010. "How complex are the contracts offered by health plans?," SERIEs, Spanish Economic Association, vol. 1(3), pages 305-323, July.
  14. Finkelstein, Amy, 2004. "Minimum standards, insurance regulation and adverse selection: evidence from the Medigap market," Journal of Public Economics, Elsevier, vol. 88(12), pages 2515-2547, December.
  15. Laurie J. Bates & James I. Hilliard & Rexford E. Santerre, 2012. "Do Health Insurers Possess Market Power?," Southern Economic Journal, Southern Economic Association, vol. 78(4), pages 1289-1304, April.
  16. repec:tpr:qjecon:v:90:y:1976:i:4:p:630-49 is not listed on IDEAS
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