Competition Between HMO and PPO: A Two-Sided Market Approach

Facultad Economia, Universidad del Rosario, No. 56

17 Pages Posted: 13 Dec 2009

See all articles by David Bardey

David Bardey

Universidad de los Andes, Colombia - Department of Economics

Jean-Charles Rochet

GFRI, University of Geneva; Swiss Finance Institute; University of Zurich - Swiss Banking Institute (ISB)

Date Written: January 28, 2009

Abstract

Classical analysis of health insurance markets often focuses on adverse selection, which creates a direct externality between the enrollees of the same health plan: under an imperfect risk adjustment, the higher the risks of my co-enrollees, the higher my cost of insurance. This has lead to the view that restricting the diversity of accessible physicians may be good for policyholders, in a context where competition between health plans can lead to a "death spiral" for the less restrictive plan. This paper defends the opposite view that diversity might pay, because of the indirect externality between policyholders and physicians. By attracting higher risks, the less restrictive plan may also guarantee a higher level of activity to its physicians, and therefore negotiate with them a lower fee-for-service rate. By explicitly modeling the two sides of the market for health (policyholders and physicians), we are able to find examples in which competition between health plans gives a higher profit to the less restrictive plan.

Keywords: Two-sided Markets, Managed Care Competition, Network Effects, Adverse Selection

JEL Classification: I11, L11, L42

Suggested Citation

Bardey, David and Rochet, Jean-Charles, Competition Between HMO and PPO: A Two-Sided Market Approach (January 28, 2009). Facultad Economia, Universidad del Rosario, No. 56. Available at SSRN: https://ssrn.com/abstract=1520976 or http://dx.doi.org/10.2139/ssrn.1520976

David Bardey (Contact Author)

Universidad de los Andes, Colombia - Department of Economics ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia

Jean-Charles Rochet

GFRI, University of Geneva ( email )

102 Bd Carl-Vogt
Genève, CH - 1205
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

University of Zurich - Swiss Banking Institute (ISB) ( email )

Plattenstrasse 14
CH-8032 Zurich, Zurich 8032
Switzerland

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