Rewarding inventors with inefficient monopoly power has long been regarded as the price of encouraging innovation. Prescription drug insurance escapes that trade-off and achieves an elusive goal: lowering static deadweight loss, without reducing incentives for innovation. As a result of this...

Monopolies appear throughout health care. We show that health insurance operates like a conventional two-part pricing contract that allows monopolists to extract profits without inefficiently constraining quantity. When insurers are free to offer a range of insurance contracts to different...