Yeon-Koo Che and Ian Gale

Buyer Alliances and Managed Competition

In a health insurance market, a large employer or an organized “buyer alliance” is in a position to influence the design of plans offered to its members. We study how the sponsors of buyer alliances manage competition among insurance firms by focusing on their choices of the format of competition, the number of firms allowed to compete, and the quality of care offered by the firms. We find deviations from optimality in all three dimensions. Specifically, we find a tendency toward too many firms and too much quality, and a bias toward a format involving the prescreening of insurance plans by the sponsor.