Are Invisible Hands Good Hands? Moral Hazard, Competition, and the 2nd Best in Health Care Markets

29 Pages Posted: 4 Dec 1998

See all articles by Martin Gaynor

Martin Gaynor

Carnegie Mellon University; National Bureau of Economic Research (NBER); Leverhulme Centre for Market and Public Organisation

Deborah Haas-Wilson

Smith College

William B. Vogt

RAND Corporation; National Bureau of Economic Research (NBER)

Date Written: November 30, 1998

Abstract

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.

JEL Classification: I11, L1, L4

Suggested Citation

Gaynor, Martin and Haas-Wilson, Deborah and Vogt, William B., Are Invisible Hands Good Hands? Moral Hazard, Competition, and the 2nd Best in Health Care Markets (November 30, 1998). Available at SSRN: https://ssrn.com/abstract=135855 or http://dx.doi.org/10.2139/ssrn.135855

Martin Gaynor (Contact Author)

Carnegie Mellon University ( email )

H. John Heinz III School of Public Policy
and Management
Pittsburgh, PA 15213-3890
United States
412-268-7933 (Phone)
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National Bureau of Economic Research (NBER)

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Leverhulme Centre for Market and Public Organisation

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Deborah Haas-Wilson

Smith College ( email )

Department of Economics
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United States
413-585-3636 (Phone)
413-585-3635 (Fax)

William B. Vogt

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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