Price dispersion in the private health insurance industry: The case of Catalonia

a r t i c l e i n f o This paper presents a vertical and horizontal product differentiation model that explains price dispersion among different kinds of health care insurance firms. Our model shows large insurance firms engaging in price competition with small mutual organizations that serve only a local area and charge lower premiums. We found that, although the market allows the entry of an excessive number of firms, the presence of local insurance companies increases social welfare by increasing the range of products available to consumers. Our conclusions are applicable to OECD countries in general although we rely on Catalonia's data. In one third of OECD countries, 30% or more of their population has a private health insurance (PHI). The importance of PHI in each one of these countries is conditioned by the implantation of public health (Colombo and Tapay, 2004). Thus, whereas 35% of the population of the USA has PHI, this percentage decreases to 20% in Spain, 12.5% in Germany and 1% in Italy. From another perspective, whereas in some OECD countries PHI is an alternative to public health in others it is complementary to it. The Spanish " Sistema Nacional de Salud " (National Health System) is a public healthcare decentralized mechanism that provides universal coverage. However, in addition to the taxes paid to finance public healthcare, almost a quarter of the population of Spain also pay an insurance premium to use private healthcare services. People pay a double coverage to access a greater number of healthcare providers, better hospital accommodation and shorter waiting lists. 1 Spanish insurance firms providing health services establish a contractual relationship between healthcare providers, hospitals and doctors , and the insurance company (similar to USA's 'managed care') and account for approximately 90% of all health insurance plans. Health insurers that provide reimbursement of expenses ('traditional health insurance plans' in the USA) only account for the remaining 10%. A recurrent fact of the health insurance industry is price dispersion. Literature explains it from clients' search costs, when they search prices and service qualities, and switching costs, when they decide to use a new provider (Gravelle and Masiero, 2000; Schlesinger and von der Schulenburg, 1991), factors both, implying a quite profitable industry. However, Spanish health insurance industry evidences low search and switching costs, because firms do not tend to penalize the newly insured, and they provide lists of health service …