Collusion in the Private Health Insurance Market: Empirical Evidence for Chile

Abstract

In September 2005, the Chilean Competition Authority filed a lawsuit against the 5 largest private health insurance providers for violation of antitrust laws, specifically accusing them of collusion in the coverage of the plans offered to consumers between March 2002 and March 2003. In fact, during that period these 5 providers reduced the coverage offered from 100% for hospitalization and 80% for ambulatory care to 90% and 70% respectively. As usual the observation of parallel conduct is not enough to infer collusion and it is required to observe additional factors allowing to reject the hypothesis of firms behaving competitively.In this paper, we analyze the institutional framework and the main characteristics of the health system in Chile to show the existence of market segmentation, limited price competition, barriers to entry, and important switching costs. All of which allows to sustain a collusive agreement making it difficult for a new entrant to gain a significant market share quickly, even if it offers a better health insurance plan. Then, we adapt an imperfect competition model of product differentiation with risk averse consumers to derive some testable propositions that allow us to distinguish between competition and collusion outcomes in the health insurance market. Finally, we present robust econometric showing a statistically significant reduction in sales effort, marketing expenses and switching rates among cartel members, compared to non-cartel members, and also show an increase in the profitability of all providers in the market, but a statistically significant higher increase in the profitability of non-cartel members. The empirical evidence, therefore, is consistent with a collusive agreement among the 5 largest health providers to reduce insurance coverage and inconsistent with a competitive equilibrium.