Two-sided health plan competition with partial multihoming and quality differentiation over providers

Abstract

We use a two-sided market approach to study competition between two health care plans who competes both provider side and policyholder side. Providers' differentiation is characterized by locations and qualities, whereas policyholders' is depicted by health risks. The quality of a health plan is defined as the percentage of high quality providers in the same network. By choosing prices for both sides, the qualities are then endogenously determined. We show that despite high ability providers requires more expensive prices, more (or at least the same number of ) high quality providers are envolved in plans than low quality providers in any equilibrium. It rests on our assumption that high quality providers generate more network externality on policyholder side. And the plan serves higher risk policyholders provides higher (or at least the same level of) quality since quality is valued more by higher risk policyholders than those of lower risks. Moreover, through comparing multihoming and singlehoming on provider side, we show that allowing multihoming may improve qualities and social welfare. It is because with partial multihoming policyholders are linked with more providers than with singlehoming. In some circumstances, multihoming also increases profits of both health plans, thus, health plans may favor multihoming over singlehoming which is contrary to the competitive bottleneck case.