Liquidity Constraints, Insurance Coverage, and Market Outcomes

Abstract

The implications of health insurance provision to market outcomes are studied in a model with liquidity-constrained consumers and multiple differentiated medical providers. Within this framework, insurance provision induces two contradicting effects on medical prices: lower demand elasticity under insurance sales works to increase prices, and a market size effect works to decrease prices by bringing new providers into the market. If liquidity constraints under spot sales are sufficiently binding relative to market-entry cost per consumer, insurance provision brings medical prices down, below their spot market level, and improves welfare. The analysis applies also to the impact of premium subsidies and universal coverage on medical prices.

Keywords: Health Insurance, liquidity Constraints, Medical Prices, Market Welfare