Minimum coverage regulation in insurance markets (original) (raw)
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Collusion in a One-Period Insurance Market with Adverse Selection
SSRN Electronic Journal, 2000
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 pro…t one in which low-risks implicitly subsidize high risks, to one where …rms obtain pro…ts 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 …rms'pro…ts increase. Recently the Chilean antitrust authority (Fiscalía Nacional Económica) accused …ve of the largest private health insurers of collusion after they had reduced the coverage o¤ered to their customers and as a result signi…cantly raised their pro…ts. Our model is consistent with this accusation.
The welfare cost of unpriced heterogeneity in insurance markets
The RAND Journal of Economics, 2016
We consider the welfare loss of unpriced heterogeneity in insurance markets, which results when private information or regulatory constraints prevent insurance companies to set premiums reflecting expected costs. We propose a methodology which uses survey data to measure this welfare loss. After identifying some "types" which determine expected risk and insurance demand, we derive the key factors defining the demand and cost functions in each market induced by these unobservable types. These are used to quantify the efficiency costs of unpriced heterogeneity. We apply our methods to the US Long-Term Care and Medigap insurance markets, where we find that unpriced heterogeneity causes substantial inefficiency.
Strategic Price Discrimination in Compulsory Insurance Markets
The Geneva Risk and Insurance Review, 2005
This paper considers price discrimination when competing firms do not observe a customer's type but only some other variable correlated to it. This is a typical situation in many insurance markets-such as motor insurancewhere it is also often the case that insurance is compulsory. We characterise the equilibria and their welfare properties under various price regimes. We show that discrimination based on immutable characteristics such as gender is a dominant strategy, either when firms offer policies at a fixed price or when they charge according to some consumption variable that is correlated to costs. In the latter case, gender discrimination can be an outcome of strategic interaction alone in situations where it would not be adopted by a monopolist. Strategic price discrimination may also increase cross subsidies between types, contrary to expectations.
Public Health Insurance with Monopolistically Competitive Providers and Optional Spot Sales
The B.E. Journal of Economic Analysis & Policy
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.
Efficiency of Competition in Insurance Markets with Adverse Selection
SSRN Electronic Journal, 2000
There is a general presumption that competition is a good thing. In this paper we show that competition in the insurance markets can be bad when there is adverse selection. Using the dual theory of choice under risk, we are able to fully characterize both the competitive and the monopoly market outcomes. When there are two types of risk, the monopoly dominates competition if and only if competition leads to market unravelling. When there are a continuum of types the e¢ ciency of competition is less trivial. In e¤ect monopoly is shown to provide better insurance but at the cost of driving out some agents from the market. Performing simulation for di¤erent distributions of risk, we …nd that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. The reason is that the monopolist can exploit its market power to relax the incentive constraints.
E-ciently Regulated Competition in Insurance Economies with Adverse Selection
2005
In insurance economies with a continuum of agents and adverse selection, it is shown that incentive-constrained Pareto e‐cient allocations correspond to regulated competitive (or compensated competitive) equilibria in markets with non-linear pricing for options to buy insurance contracts. These options make the incentive constraints self-enforcing. E‐ciency is achieved through a \universal service" requirement allowing only new contracts or blocking coalitions that beneflt all potential types of each agent. This regulation prevents \cream skimming" intended to exclude high-risk agents. Under suitable assumptions, regulated equilibria are shown to exist and be characterized as \regulated core" allocations. [94 words]
Journal of Health Economics, 2000
A competitive market for individual health insurance tends to risk-adjusted premiums. Premium rate restrictions are often considered a tool to increase access to coverage for high-risk individuals in such a market. However, such regulation induces selection which may have several adverse effects. As an alternative approach we consider risk-adjusted premium subsidies. Empirical results of simulated premium models and subsidy formulae are presented. It is shown that sufficiently adjusted subsidies eliminate the need for premium rate restrictions and consequently avoid their adverse effects. Therefore, the subsidy approach is the preferred strategy to increase access to coverage for high-risk individuals. q
Insurance under moral hazard and adverse selection: The case of pure competition
1997
We consider a model of pure competition between insurers a la Rothschild-Stiglitz, where two types of agents privately choose an effort level, and where the effort costs and the resulting accident probabilities differ across agents. We characterize the set of possible separating equilibria, with a special emphasis on the case where the Spence-Mirrlees condition is not satisfied. We show, in particular, that several equilibria a la Rothschild-Stiglitz may coexist; that they are Pareto-ranked, only the best of them being an equilibrium in the sense of Hahn (1978); and that equilibria may take original forms (for instance, both revelation constraints may then be binding). Finally, we discuss the existence of an equilibrium in this context, and show that, though equilibria may fail to exist, conditions for existence may differ from those in the initial Rothschild-Stiglitz setting.