DP7576 Selective contracting and foreclosure in health care markets

Author(s): Michiel Bijlsma , Jan Boone , Gijsbert Zwart

Publication Date: November 2009

Keyword(s): anti-competitive effects , exclusion , foreclosure , health insurance , selective contracting , uninsured

JEL(s): G22 , I11 , L42

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP7576.asp.asp

We analyze exclusive contracts between health care providers and insurers in a model where some consumers choose to stay uninsured. In case of a monopoly insurer, exclusion of a provider changes the distribution of consumers who choose not to insure. Although the foreclosed care provider remains active in the market for the non-insured, we show that exclusion leads to anti-competitive effects on this non-insured market. As a consequence exclusion can raise industry profits, and then occurs in equilibrium. Under competitive insurance markets, the anticompetitive exclusive equilibrium survives. Uninsured consumers, however, are now not better off without exclusion. Competition among insurers raises prices in equilibria without exclusion, as a result of a horizontal analogue to the double marginalization effect. Instead, under competitive insurance markets exclusion is desirable as long as no provider is excluded by all insurers.