Christoph Schottmüller, University of Copenhagen: "Health Provider Networks, Quality and Costs"

"Health Provider Networks, Quality and Costs"


We consider two providers that differ in quality and costs. When buying health insurance, consumers cannot observe provider quality nor costs. We derive an equilibrium where insurers signal quality by their choice of provider network. Selective contracting focuses on low costs providers. Contracting both providers signals quality.

Market power tends to lower quality and lead to inefficiency. We show that providers underinvest in quality while there can be both over and underinvestment in cost reductions if there is a monopoly insurer while an efficient investment equilibrium exists in an insurer duopoly.