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Licensed Unlicensed Requires Authentication Published by De Gruyter January 23, 2018

Public Health Insurance with Monopolistically Competitive Providers and Optional Spot Sales

  • Gilad Sorek EMAIL logo and T. Randolph Beard


We study the implications of extending public-insurance coverage over differentiated medical products of the same therapeutic group to market outcomes. The public insurer can set the reimbursement level for medical providers and the copayment for the insured for medical care provided under the policy coverage, but cannot directly control providers’ spot sales (outside of insurance) price. In this setup, the price offered by the public insurer to medical providers must maintain their reservation profit from selling on the spot market directly to consumers. We show that the public insurer can manipulate this reservation profit by setting the copayment rate, and thereby promote market welfare while increasing consumers’ surplus due to lower medical prices and lower market entry. The results survive generalizations including moral hazard and incomplete insurance coverage.

JEL Classification: I-13; I-18; K-35


We thank the Editor Johann Brunner and three referees of this journal for their comments, which helped us to significantly improve this article. We have benefited also from comments by Henry Lin, and from participants in the 2016 Southern Economic Association conference in Washington, DC, the 2017 International Industrial Organization Conference in Boston, MA, and the 2017 Congress of the International Health Economics Association at Boston University.


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Published Online: 2018-1-23

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