Working Paper: CEPR ID: DP10381
Authors: Jan Boone; Christoph Schottmüller
Abstract: We provide a modeling framework to think about selective contracting in the health care sector. Two health care providers differ in quality and costs. When buying health insurance, consumers observe neither provider quality nor costs. We derive an equilibrium where health insurers signal provider quality through their choice of provider network. Selective contracting focuses on low cost providers. Contracting both providers signals high quality. Market power tends to lower quality and lead to inefficiency. In a dynamic extension of the model, providers under-invest in quality while there can be both over and under-investment in cost reductions if there is a monopoly insurer while an efficient investment equilibrium exists with insurer competition.
Keywords: common contracts; exclusive contracts; health care quality; managed care; selective contracting; signaling
JEL Codes: D86; I11; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Selective contracting (L33) | perceived quality (L15) |
| Insurer choice of provider through selective contracting (I11) | inefficiency (D61) |
| Patient choice of providers (I11) | cost inefficiency (D61) |
| Insurer competition (G52) | efficient outcome (D61) |
| Monopoly insurer conditions (D42) | underinvestment in quality (L15) |
| Competitive insurers (G22) | efficient investment in quality (L15) |
| Competitive insurers (G22) | cost reductions (D61) |