Coinsurance vs. co-payments: Reimbursement rules for a monopolistic medical product with competitive health insurers

Abstract

This paper studies a market for a medical product in which there is perfect competition among health insurers, while the good is sold by a monopolist. Individuals differ in their severity of illness and there is ex postmoral hazard. We consider two regimes: one in which insurers use coinsurance rates (ad valorem reimbursements) and one in which insurers use co-payments (specific reimbursements). We show that the induced equilibrium with co-payments involves a lower producer price and a higher level of welfare for consumers even though it may imply a larger consumer price. This result provides strong support for a reference price based reimbursement policy.