Unveiling 'Invisible Hands': Two-Sided Platforms in Health Care Markets

Bronwyn Howell

No 18936, Working Paper Series from Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation

Abstract: A popularly-held tenet in health economics is that as a consequence of the presence of insurance subsidies for treatment costs health care markets differ so significantly from hypothetical 'perfect competition' that competition and antitrust laws possibly should not be enforced in health care markets or enforced differently in health care than in other markets. Drawing upon the principles of markets with two-sided platforms which are similarly characterised by approaches to competition where welfare is maximised when prices differ from marginal cost this paper develops an alternative taxonomy for thinking about institutional design and the application of competition principles in health care markets. The taxonomy separates out the aspects of health care markets that address the nonmarketability of the risk associated with an individual's uncertainty about demand for health care - the insurance 'platform' - from other information asymmetries attending the delivery of care. Comparison of the resulting taxonomy with the markets for other goods funded predominantly by insurance benefits (e.g. panelbeaters repairing crash-damaged vehicles) leads to the conclusion that it is predominantly the presence of insurance premium subsidies that leads to specific challenges in the design and operation of socially-optimal health care markets. The taxonomy places 'two-sided' insurance platforms at the core of health care markets. The ensuing implication is that contractual and institutional design in the sector should reflect this defining characteristic. Whilst the nature of competition in health care provision markets still matters it ensues from and is secondary to the nature of insurance market design. Deviations from the standard principles of competition in 'two-sided' insurance markets must therefore be analysed separately from competition in markets for health care service provision. Furthermore these principles can be utilised independent of the ownership form of either the insurers or the care providers and therefore provide guidance for both policy-makers designing health care markets and regulators monitoring and enforcing sector performance.

Date: 2006
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