The design of insurance coverage for medical products under imperfect competition *

• We study the design of health insurance under imperfect competition in the market for the medical products.
• Both an ad valorem coinsurance rate and a specific (per unit) copayment are used.
• By combining both instruments, the insurer can control the producer price.
• The solution is second best optimal, and additional rationing of coverage because of imperfect competition is not necessary.
• It involves the smallest possible copayment combined with the largest possible coinsurance rate.

This paper studies the design of health insurance with ex post moral hazard, when there is imperfect competition in the market for the medical product. Various scenarios, such as monopoly pricing or horizontal differentiation are considered. Insurers (or their regulator) can commit to a reimbursement policy which specifies two types of copayments: an ad valoremcoinsurance rate and a specific (per unit) copayment. By combining both copayment rates in an adequate way the insurer can effectively control the producer price, which is then set so that the producer's revenue just covers fixed costs. Consequently, a suitable regulation of the copayment instruments leads to the same reimbursement rule as under perfect competition for medical products. Additional rationing of coverage because of imperfect competition is notnecessary. The optimal policy involves the smallest possible copayment combined with the largest possible coinsurance rate such that the participation constraint of health providers is binding.