The Structure of Health Insurance and the Erosion of Competition in the Medical Marketplace

by Joseph P. Newhouse

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Analysis of the effect of nearly 100 percent insurance coverage on the concept of a competitive health care market. The author argues that such high levels of insurance permit prices and expenditures to increase at above average rates independent of a change in demand that a change in insurance induces. Results indicate that hospital prices could continue to increase at above average rates for a long time if present institutions are not changed, and that increased insurance coverage for other services (dental, drugs, physician services) could cause prices and expenditures for those services to increase dramatically. Possible solutions: (1) Do nothing--some propose that the cure is worse than the disease. (2) Regulate--proponents of this idea argue that a market solution is inappropriate or infeasible. (3) Market strategy--a substantial deductible for outpatient services in insurance policies would have insured consumers seeking lower cost care; premiums related to choice of provider would cause inefficient providers to lose business.

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