Health insurance as a two-part pricing contract

Abstract

Monopolies appear throughout health care. We show that health insurance operates like a conventional two-part pricing contract that allows monopolists to extract profits without inefficiently constraining quantity. When insurers are free to offer a range of insurance contracts to different consumer types, health insurance markets perfectly eliminate deadweight losses from upstream health care monopolies. Frictions limiting the sorting of different consumer types into different insurance contracts restore some of these upstream monopoly losses, which manifest as higher rates of uninsurance, rather than as restrictions in quantity utilized by insured consumers. Empirical analysis of pharmaceutical patent expiration supports the prediction that heavily insured markets experience little or no efficiency loss under monopoly, while less insured markets exhibit behavior more consistent with the standard theory of monopoly.

Do companies in the pharmaceutical supply chain earn excess returns?

“…Such monopoly power does lead to higher prices following drug approval, which would be harmful to patients if it results in underutilization of drugs. However, in markets with insurance, where a majority of patients face limited copays or other out of pocket costs, underutilization is arguably a minor issue (Lakdawalla and Sood 2013 ): roughly 8% of adults report they do not take drugs as prescribed to save money (Cohen and Villarroel 2013 ). Furthermore, patients in the US may tend to have access to drugs that are not available in markets outside the US (Danzon and Furukawa 2008 ; Haninger 2018 ).…”

Beyond Pigou: externalities and civil society in the supply–demand framework

“…3 , the low marginal price is evidence that the sales quantity has been moved away from D (1) in the direction of D (1 − δ ). Indeed, studies have observed that, in pharmaceutical markets where insurance plans are major purchasers, the quantity of prescription sales is essentially the same for monopoly drugs as for drugs with many sellers, even though monopoly list and average prices are quite high (Lakdawalla & Philipson, 2012 ; Lakdawalla & Sood, 2013 ). That is, the studies have not been able to detect underutilization as a result of pharmaceutical monopolies, although monopoly may create noticeable management costs (Mulligan, 2022 ).…”

Social desirability of entry in a bilateral oligopoly—The implications of (non) sunk costs

“…Replacing β with α in (26) leads to stage 2's equilibrium profits in (13). Furthermore, Replacing β with α in (28) leads to the result in (14).…”