Equilibrium in Competitive Insurance Markets with Medical Tourism

Abstract

In recent years, the rising healthcare costs in the United States have led many citizens to travel outside the country for medical care. Although such practice, commonly known as ‘medical tourism’, has become more and more popular, many insurance companies hesitate to incorporate a medical tourism option into insurance contracts. In this article, we wish to understand the theoretical rationale of that by designing an insurance contract in an environment where medical tourism is available. One crucial characteristic that influences consumers’ decision on whether to choose medical tourism is their tolerance levels associated with unexpected costs when travelling abroad for healthcare. In this article, we wish to investigate how the individuals with preference heterogeneity would self-select between the options of domestic treatment and treatment abroad offered in the contract. The results suggest that when the healthcare costs from both the treatment abroad and the domestic treatment are high and/or there is a higher chance of needing an elective treatment for the individual, insurance companies will more likely incorporate medical tourism in the contract. JEL Classification: C73, I13, D82, D86