Abstract
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.
Acknowledgements
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.
References
Bardey, D., C. Cantac, and J.-M. Lozachmeur. 2012. “The Regulation of Health Care Providers’ Payments when Horizontal and Vertical Differentiation Matters”. Journal of Health Economics 31:691–704.10.1016/j.jhealeco.2012.04.002Search in Google Scholar
Bardey, D., H. Cremer, and J-M Lozachmeur. 2016a. “The Design of Insurance Coverage for Medical Products under Imperfect Competition”. Journal of Public Economics 137:28–37.10.1016/j.jpubeco.2016.03.006Search in Google Scholar
Bardey, D., B. Jullien, and J-M. Lozachmeur. 2016b. “Health Insurance and Diversity of Treatment: A Policy Mix Perspective”. Journal of Health Economics 47:50–63.10.1016/j.jhealeco.2016.01.003Search in Google Scholar
Brekke, K., C. Canta, and O.R. Straume 2016. “Reference Pricing with Endogenous Generic Entry”. Journal of Health Economics 50:312–329.10.1016/j.jhealeco.2016.04.003Search in Google Scholar
Carone, G., C. Schwierz, and A. Xavier. 2012. “Cost-containment Policies in Public Pharmaceutical Spending in the EU”. European Economy, Economic Papers 461, European Commission. http://apps.who.int/medicinedocs/documents/s19981en/s19981en.pdf.10.2139/ssrn.2161803Search in Google Scholar
DiMasi, J. A., and C. Paquette. 2004. “The Economics of Follow-on Drug Research and Development: Trends in the Entry Rates and the Timing of Development”. Pharmaco Economics 22:1–14.10.2165/00019053-200422002-00002Search in Google Scholar
Douven, R, R. Halbersma, K. Katona, and V. Shestalova. 2014. “Vertical Integration and Exclusive Behavior of Insurers and Hospitals”. Journal of Economics & Management Strategy 23:344–368.10.1111/jems.12056Search in Google Scholar
Duggan M., and F. Scott-Morton. 2010. “The Effect of Medicare Part D on Pharmaceutical Prices and Utilization”. American Economic Review 100:590–607.10.1257/aer.100.1.590Search in Google Scholar
Duggan M., and F. Scott Morton. 2011. “The Medium-term Impact of Medicare Part D on Pharmaceutical Prices”. American Economic Review 101:387–392.10.1257/aer.101.3.387Search in Google Scholar
Economides, N. 1993. “Quality Variations in the Circular Model of Variety Differentiated Products”. Regional Science and Urban Economics 23:235–257.10.1016/0166-0462(93)90005-YSearch in Google Scholar
Ehrlich, I., and G. S. Becker. 1972. “Market Insurance, Self-Insurance and Self Protection”. Journal of Political Economy 80:623–649.10.1086/259916Search in Google Scholar
Gal–Or, E. 1999. “Mergers and Exclusionary Practices in Health Care Markets”. Journal of Economics & Management Strategy 8:315–350.10.1162/105864099567686Search in Google Scholar
Gaynor, M., and R. J. Town. 2012. “Competition in Healthcare Markets”. In Handbook of Health Economics, Volume 2, Chapter 9, edited by T. G. McGuire, M. V. Pauly and P. Pita Barros. Amsterdam and London: Elsevier North-Holland.Search in Google Scholar
Grossman, V. 2013. “Do Cost-sharing and Entry Deregulation Curb Pharmaceutical Innovation?” Journal of Health Economics 32:881–894.10.1016/j.jhealeco.2013.06.001Search in Google Scholar
Lakdawalla, D., and N. Sood. 2009. “Innovation and the Welfare Effects of Public Drug Insurance”. Journal of Public Economics 93:541–548.10.1016/j.jpubeco.2008.11.003Search in Google Scholar
Lakdawalla, D., and N. Sood. 2013. “Health Insurance as a Two-part Pricing Contract”. Journal of Public Economics 102:1–12.10.1016/j.jpubeco.2013.03.001Search in Google Scholar
Mankiw N. G., and M. D. Whinston. 1986. “Free Entry and Social Inefficiency”. RAND Journal of Economics 17:48–58.10.2307/2555627Search in Google Scholar
Nell, M., A. Richter, and J. Schiller. 2009. “When Prices Hardly Matter: Incomplete Insurance Contracts and Markets for Repair Goods”. European Economic Review 53:343–354.10.1016/j.euroecorev.2008.05.009Search in Google Scholar
Ridley, D. B. 2015. “Payments, Promotion, and the Purple Pill”. Health Economics 24:86–103.10.1002/hec.3005Search in Google Scholar
Salop, S. C. 1979. “Monopolistic Competition with Outside Goods”. The Bell Journal of Economics 10:141–156.10.2307/3003323Search in Google Scholar
Sood, N., H. de Vries, I. Gutierrez, D. N. Lakdawalla, and D. P. Goldman. 2009. “The Effect of Pharmaceutical Regulation on Revenues”. Health Affairs 28: 125–137.10.1377/hlthaff.28.1.w125Search in Google Scholar
Vaithianathan, R. 2006. “Health Insurance and Imperfect Competition in the Healthcare Market”. Journal of Health Economics 25:1193–1202.10.1016/j.jhealeco.2006.03.003Search in Google Scholar
© 2018 Walter de Gruyter GmbH, Berlin/Boston
