Health Care Network Formation and Policyholders' Welfare

We develop a model in which two insurers and two health care providers compete for a fi xed mass of policyholders. Insurers compete in premium and o er coverage against financial consequences of health risk. They have the possibility to sign agreements with providers to establish a health care network. Providers, partially altruistic, are horizontally diff erentiated with respect to their physical address. They choose the health care quality and compete in price. First, we show that policyholders are better o under a competition between conventional insurance rather than under a competition between integrated insurers (Managed Care Organizations). Second, we reveal that the competition between a conventional insurer and a Managed Care Organization (MCO) leads to a similar equilibrium than the competition between two MCOs characterized by a diff erent objective i.e. private versus mutual. Third, we point out that the ex ante providers' horizontal diff erentiation leads to an exclusionary equilibrium in which both insurers select one distinct provider. This result is in sharp contrast with frameworks that introduce the concept of option value to model the (ex post) horizontal diff erentiation between providers