Medical Insurance and Uncertain Treatment Effect
Gilad Sorek
Department of Economics, Auburn University
Auburn, AL 36830, USA
Extended Abstract
Medical care provided to treat a certain diagnosis has uneven effect on different patients. Part of the variance in patients responsiveness to medical care reveals only after the treatment is given (Ex-post). Another part of it may be predicted even before getting sick (through genetic checks for example). The remaining part reveals as part of the diagnosis –i.e. Interim revelation: where the malady –have different forms of appearance (different types of skin cancer tumors for examples), or due to the timing of detection (early vs. late stage diagnoses). For the latter case medical insurance bundles different possible Interim valuations of treatment under one Ex-ante payment - the premium.
This work explores the implication of this via-insurance bundling on the market for medical technologies (e.g. pharmaceuticals), employing the conventional Hoteling setup for heterogeneous consumers, who’s types –responsiveness to treatment - reveals only after getting sick). A similar setup was employed in resent work that study effect of medical insurance on market outcomes with differentiated medical needs, assumed each consumer knows its exact type before buying insurance (Nell, Richter and Schiller 2009, and Grossman 2013). These studies however, assume that each consumer knows its exact medical need (type) before getting sick.
For monopolistic market, we show that the opportunity to bundle through insurance can efficiently increase medical care utilization and spending. This is solely through the effect of non-linear pricing (i.e. up front lump-sum payment), as the uncertainty regarding treatment effectiveness is not reduces. This result concurs with the works of Lakdawalla and Sood (2009, 2013) on health insurance as a two-part tariff.
In the case of duopoly, bundling through insurance changes the nature of competition from competition over the marginal consumer to competition over marginal insurance coverage for complementing range of disease realizations. The value of marginal coverage here concurs with the one studied in the work by Dranove et al. (2003) on option demand. We show that (1) there is no equilibrium without bundling through insurance, (2) when both technologies are sold through insurance the maximal product differentiation principle still applies, (3) equilibrium prices and thereby medical spending may be lower r higher compared with per-unit price competition, depending positively on the variance of treatment effectiveness.
References:
Capps C, Dranove D., Satterthwaite M. , 2003. Competition and market Power in option Demand Markets. RAND Journal of Economics 34, 737–763.
Lakdawalla D., Sood N, 2009. Innovation and the welfare effects of public drug insurance. Journal of Public Economics 93, 541–548.
Lakdawalla D., Sood N, 2013. Health insurance as a two-part pricing contract. Journal of Public Economics 102, 1–12
Nell, M., Richter, A., Schiller, J., 2009. When prices hardly matter: incomplete insurance contracts and markets for repair goods. European Economic Review, 53, 343–354
Grossman V., 2013. Do cost-sharing and entry deregulation curb pharmaceutical innovation?. Journal of Health Economics, 32, 881– 894