Problem
The US does not have a national system of universal healthcare. Unless someone is poor, elderly or disabled, they can only obtain insurance through their employer or by purchasing an individual policy from an insurance company. Recently, the Affordable Care Act created a set of health care exchanges whose purpose is to make it easier and more affordable for individuals to buy health insurance. Insurance companies make insurance policies available on the exchange, and individuals-who are now required by law to have health insurance-can buy policies. Which of the following hypothetical conditions would likely lead to more (rather than less) price rivalry (i.e. price competition that pushes prices towards marginal costs) among insurance companies in the health care exchanges?
1. The medical coverage offered by the policies on the exchange is tightly regulated. The regulations specify coverage levels, what conditions must be covered, what conditions are excluded, and many other policy features.
2. Insurance companies are allowed to advertise specific differences between their policies and competitors' offerings. For example, they can advertise differences in the quality of their customer service and the breadth of their network of doctors and hospitals.
3. Individuals must purchase from the exchanges as individuals. That is, individuals cannot pool together to create large buying groups.
4. Insurance companies are allowed to present information about their policies in whatever form they wish. For example, there are no requirements about the content or format of the information displayed by insurance companies on the exchange websites.