Competition Strategy for Healthcare Insurance Plans

Abstract

We develop a theoretical framework for a two-sided market structure to model the competition between a Preferred Provider organization (PPO) and a Health Maintenance organization (HMO). Both health plans compete to attract policyholders and providers. Our game-theoretical framework examines the consequences of risk segmentation on providers and the network effect on policyholders based on market information and network size. The outcome of the competition depends mostly on two effects: a market share effect and an adverse selection effect, captured by policyholders’ surplus expectations on both policies and copayments. If the adverse selection effect is strong enough, the HMO plan gets higher profits. On the other hand, if the market share effect dominates, the PPO profit is higher despite the unfavorable risk segmentation and higher premium. The twosided nature of the health insurance market can explain the preference of higher flexibility that has been observed during the last 15 years in the US health insurance market. However, PPO plans were drastically reduced in HealthCare.gov's 2016 lineup since many insurers claimed to be losing money on these plans and opted not to offer them in the health insurance exchange market. Our analysis shows that to be profitable, the PPO has to maintain an appropriate ratio between in-network copayment and out-of-network copayment. One conjecture is that HMO can offer more attractive remuneration to the physicians’ side and premium to the policyholders’ side. This may explain the gradual gain in the HMO market.