Moving from a bad to a good pricing regime : the South African private health care market

Abstract

The South African private health care market combines a highly concentrated demand side with expensive medical services. This combination suggests that medical insurance schemes are not using their full market power. To explain this puzzle, we construct a delegated bargaining model in which agency costs give rise to two different pricing regimes. In the ‘good’ pricing regime, the scheme incentivises its administrator towards aggressive bargaining behaviour with health care providers. The ‘bad’ pricing regime results when the scheme decides against such incentivation. Policy measures that push the number of providers above some critical threshold can force a change from the ‘bad’ to the ‘good’ pricing regime.