Insurance access and demand response: Pricing and welfare implications

We present a model in which health insurance allows liquidity-constrained patients access to otherwise unaffordable treatments. A monopolist's profit-maximizing price for an insured treatment is greater (for any cost sharing) than it would be if the treatment was not covered. Consumer surplus may also be less. These results are based on a different mechanism than would operate in a standard moral hazard model. Our model also provides an economic rationale for the common claim that pharmaceutical firms set prices that exceed the value their products create. We show this problem is exacerbated when health insurance covers additional monopoly-provided services. (C) 2020 Elsevier B.V. All rights reserved.