Collusion in a One-Period Insurance Market with Adverse Selection

We show how collusive outcomes may occur in equilibrium in a one-period competitive insurance market characterized by adverse selection. We build on the Inderst and Wambach (2001) model --this shows that the Rothschild and Stiglitz separating equilibrium always exists when there are capacity constraints-- and we assume that insurees must pay a minimum premium, which is a common feature in many health systems. In this setup we show that there is a range of equilibria, from the zero profit one in which low-risks implicitly subsidize high risks, to one where firms obtain profits with both types of consumers. Moreover, we show that rents only partially dissipate if we assume free entry. Along these equilibria, high risks always obtain full insurance while the low risks coverage decreases as the firms' profits increase. Recently the Chilean antitrust authority (Fiscalía Nacional Económica) accused five of the largest private health insurers of collusion after they had reduced the coverage offered to their customers and as a result significantly raised their profits. Our model is consistent with this accusation