Public Health Insurance with Monopolistically Competitive Providers and Optional Spot Sales

We study the implications of extending public-insurance coverage over differentiated medical products of the same therapeutic group to market outcomes. The public insurer can set the reimbursement level for medical providers and the copayment for the insured for medical care provided under the policy coverage, but cannot directly control providers’ spot sales (outside of insurance) price. In this setup, the price offered by the public insurer to medical providers must maintain their reservation profit from selling on the spot market directly to consumers. We show that the public insurer can manipulate this reservation profit by setting the copayment rate, and thereby promote market welfare while increasing consumers’ surplus due to lower medical prices and lower market entry. The results survive generalizations including moral hazard and incomplete insurance coverage.