Fee-for-Service, Capitation and Health Provider Choice with Private Contracts

Abstract

Contracts between health insurers and providers are private; i.e. not public. By modelling this explicitly, we find the following. Insurers with bigger provider networks, pay higher fee-for-service rates to providers. This makes it more likely that a patient is treated and hence health care costs increase with provider network size. Although providers are homogeneous, the welfare maximizing provider network can consist of two or more providers. Increasing transparency of provider prices increases welfare only if consumers can process the prices of all treatments involved in an insurance contract. If not, it tends to reduce welfare.