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Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second‐Best in Health Care Markets

Martin Gaynor; Deborah Haas‐Wilson; William B. Vogt
Journal of Political Economy 2000 108(5), 992-1005
The nature and normative properties of competition in health care markets have long been the subject of much debate. In this paper we consider what the optimal benchmark is in the presence of moral hazard effects on consumption due to health insurance. Intuitively, it seems that imperfect competition in the health care market may constrain this moral hazard by increasing prices. We show that this intuition cannot be correct if insurance markets are competitive. A competitive insurance market will always produce a contract that leaves consumers at least as well off under lower prices as under higher prices.

Part D Formulary and Benefit Design as a Risk-Steering Mechanism

Dana P. Goldman; Geoffrey Joyce; William B. Vogt
American Economic Review 2011 101(3), 382-386
Medicare Part D relies upon drug plan competition. Plans have enormous scope to design benefits and to set premiums, but they may not charge differential premiums based on risk. We use the formulary and benefit design of all Medicare prescription drug plans and pharmacy claims data to construct a simulation model of out-of-pocket drug spending. We use this simulation model to examine individual incentives in Medicare Part D for adverse selection. We find that high drug users have much stronger incentives to enroll in generous plans than do low users, thus there is significant scope for adverse selection.