The nature, and normative properties, of competition in health care markets has long been the subject of much debate. In particular, policymakers have exhibited a great deal of reservation toward competition in health care markets, as demonstrated by the plethora of regulations governing the health care sector. Currently, as consolidation rapidly occurs in health care markets, concern about reduced competition has arisen. This concern, however, cannot be properly evaluated without a normative standard. In this paper we consider what the optimal benchmark is in the presence of moral hazard effects on consumption due to health insurance. Moral hazard is widely recognized as one of the most important distortions in health care markets. Moral hazard due to health insurance leads to excess consumption, therefore it is not obvious that competition is second best optimal given this distortion. Intuitively, it seems that imperfect competition in the health care market may constrain this moral hazard by increasing prices. We show that this intuition cannot be correct if insurance markets are competitive. A competitive insurance market will always produce a contract that leaves consumers at least as well off under lower prices as under higher prices. Thus, imperfect competition in health care markets can not have efficiency enhancing effects if the only distortion is due to moral hazard.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6865.
Length: Date of creation: Dec 1998 Date of revision: Handle: RePEc:nbr:nberwo:6865
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Robin Boadway & Manuel Leite-Monteiro & Maurice Marchand & Pierre Pestieau, 2002.
"Social Insurance and Redistribution,"
Working Papers
1004, Queen's University, Department of Economics.
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Other versions:
BOADWAY, Robin & LEITE-MONTEIRO, Manuel & MARCHAND, Maurice & PESTIEAU, Pierre, 2001.
"Social insurance and redistribution,"
CORE Discussion Papers
2001041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
[Downloadable!]